(Sgd.) A.B. AQUINO
The contracts with the three other realty owners have substantially the same provisions as the above-quoted contract.
During the period from October, 1953 to September. 1958 Hoskins received from the subdivision owners the sums of (1) P1,572,953.54 as selling commissions, (2) P392,658.58 as supervision fees, and (3) P285,991.47 as collection fees.
On the selling commissions, it paid P94,184.14 as six percent brokerage tax. But it did not pay any percentage tax on its supervision and collection fees.
The Commissioner of Internal Revenue ruled that the supervision and collection fees are subject to the real estate broker's percentage tax. In a letter of demand dated August 11, 1960 he required Hoskins to pay the sum of P51,140.09 as percentage tax on the collection and supervision fees amounting to P678,650.05 plus twenty-five percent surcharge. The Commissioner also imposed a compromise penalty of P8,000.
Hoskins refused to pay the deficiency assessment. It contended that the supervision and collection fees do not form part of this taxable gross compensation as a real estate broker. The Commissioner rejected Hoskins' contention. It appealed to the Tax Court.
The Tax Court found that the portion of the deficiency assessment corresponding to the period from the fourth quarter of 1953 to the second quarter of 1955 had already prescribed because the five- year period from the filing of the returns within which to assess the deficiency tax, as prescribed in section 331 of the Tax Code, had already expired on August 11, 1960, the date of the letter of demand.
The Tax Court also found that the compromise penalty of P8,000 could not be imposed in the absence of an agreement with the taxpayer (Collector of Internal Revenue vs. University of Santo Tomas, 104 Phil. 1062).
But the Tax Court sustained the Commissioner's assessment of the real estate broker's percentage tax on the supervision and collection fees received by Hoskins for the period from the third quarter of 1955 to September, 1958, computed as follows:
Total collection and supervision
fees from the third quarter of
1955 to September, 1958 ----- P516,426.03
6%, tax thereon -------------------- 30,985.56
Plus 25%, surcharge ------------- P 7,746.39
Total deficiency tax and
surcharge due --------------------- 38,731.95
The Tax Court held that the supervision and collection services performed by Hoskins were part and parcel of its work as a real estate broker in selling the subdivision lots. It applied the holding in J.M. Tuazon & Co. vs. Collector of Internal Revenue, 108 Phil. 700 that the real estate broker's percentage tax was due not only on the sales commissions received by the administrator of the subdivision but also on its administration fees.
In this appeal Hoskins contests the legality of the inclusion of the supervision and collection fees in its taxable gross compensation as a real estate broker. Those fees, like the sales commissions, were received by it from the subdivision owners.
Section 195 of the Tax Code provides that real estate brokers "shall pay a percentage tax equivalent to six per centum of the gross compensation received by them".
Section 194(s) of the Tax Code as amended by Republic Act No. 588 provides that a "real estate broker includes any person, other than a real estate salesman" "who for another, and for a compensation or in the expectation or promise of receiving compensation" performs any of the following acts:
(1) Sells or offers for sale, buys or offers to buy, lists, or solicits for prospective purchasers, or negotiates the purchase, sale or exchange of real estate or interests therein;
(2) Or negotiates loans on real estate;
(3) Or leases or offers to lease or negotiates the sale, purchase or exchange of a lease, or rents or places for rent or collects rent from real estate or improvements thereon;
(4) Or shall be employed by or on behalf of the owner or owners of lots or other parcels of real estate at a stated salary, on commission, or otherwise, to sell such real estate or any parts thereof in lots or parcels. (Paragraphing supplied).
Hoskins contends that the sale of the subdivision lots, for which it was paid sales commissions, is distinct and separate from its work as subdivision manager or the developer of the subdivision, consisting of subdividing the land into lots, constructing and maintaining streets, installing and operating utilities and other community services, for which it was paid supervision fees.
It also contends that its work of collecting the installments from the lot buyers, for which it was paid collection fees, is distinct from the work of selling the lots.
The issue is whether the term "gross compensation" in section 195 includes supervision and collection fees received by a real estate broker as a realty subdivision operator. A contingent issue is the legality of the imposition of the twenty-five percent surcharge on the deficiency assessment.
With respect to the collection fees, there can be little doubt that the services rendered by Hoskins in collecting the amounts due on the sales of lots on the installment plan are incidental to its brokerage service in selling the lots. The sale of a lot may be on the cash basis or on installment. If the broker's commissions on the cash sales of lots are subject to the brokerage percentage tax, it should logically follow that its commissions on installment sales are likewise taxable.
As to the supervision fees for the development and management of the subdivisions, which fees were paid out of the proceeds of the sales of the subdivision lots, the theory of the Tax Court is that the development, management and supervision services were necessary to bring about the sales of the lots and were inseparably linked thereto.
We hold that the Tax Court did not err in applying to this case the ruling in the Tuason case, supra where the eight percent (8%) administration fee paid by Varsity Hills, Inc. to J.M. Tuazon & Co., Inc., as developer and administrator of its subdivision, in addition to the latter's sales commission of ten percent (10%) on all sales of subdivision lots, was held to be subject to the real estate broker's percentage tax.
It was ruled in the Tuason case that "the duty of developing the subdivision, with its lots, streets, playgrounds, sewage, etc. is also a necessary incident to the duty of selling the lands subject of the contract" that the lands must be subdivided into residential lots, with streets laid out, before said lots can be sold, and that as the development work was entrusted to the broker, instead of to another person, and was integrated into the agency contract, the same must be regarded as an indivisible contract of brokerage. The instant case is similar to the Tuason case.
The history of the statutory definition of the term "real estate broker" in a way supports the view that the management of subdivisions may be regarded as a part of the real estate broker's business.
In the old Internal Revenue Law found in the Revised Administrative Code, a real estate broker is simply defined as including all persons whose business it is, for themselves or for others, (1) to negotiate purchases or sales of lands, buildings, or interest therein or (2) to negotiate loans secured by lands, buildings, or interest therein. or (3) to rent real estate for others or to collect rents thereon (Sec. 1465 [w]).
That simple definition does not contain any reference to real estate subdivisions. Republic Act No. 588, which took effect on September 22, 1950, expanded that definition by adding a fourth category of real estate brokers, namely, those persons who are employed by owners of real estate to sell, for compensation, such real estate or any parts thereof in lots or parcels. Obviously, that category refers to the sale of subdivision lots.
Circumstances have transformed real estate brokers from mere agents, negotiating the purchase and sale of lands, into realtors or operators of real estate subdivisions. The increase in population and the rising middle class have created a considerable demand for housing lots. To meet the great demand landowners have converted farm lands into residential lands. But many of them do not want to shoulder the onerous task of developing and managing their subdivisions. They entrust that prestation to the real estate broker who willingly assumes that responsibility because it means that the availability of lots for sale would be insured.
Hence, there is basis for holding that the operation of subdivisions is really incidental to the main business of the broker which is the sale of the lots on commission.
Hoskins assails the imposition of the twenty-five percent surcharge as penalty for delinquency. Section 183 of the Tax Code provides that if the business percentage tax is not paid within twenty days after the end of each month (formerly calendar quarter), "the amount of the tax shall be increased by twenty-five per centum, the increment to be a part of the tax".
Considering that the taxability of collection and supervision fees was really a debatable or controversial matter and was set at rest only on June 30,1960, when the Tuason case, supra, was decided, we believe that the imposition of the twenty-five percent surcharge under the circumstances obtaining in this case (involving 1955 to 1958 deficiency tax) is not justified (Imus Electric Co., Inc. vs. Commissioner of Internal Revenue, L-22421, March 18, 1967, 19 SCRA 612).
WHEREFORE, the Tax Court's judgment is modified by eliminating therefrom the twenty-five percent surcharge amounting to P7,746.39 and affirming it as to the deficiency percentage tax amounting to P30,985.56. No costs.
SO ORDERED.
Fernando (Chairman), Antonio, Muñoz Palma and Martin, JJ., concur.
Barredo, J., took no part.
Concepcion, Jr., J., is on leave.
The Lawphil Project - Arellano Law Foundation
