BIR Ruling No. 050-64

August 4, 1964 BIR RULING NO. 050-64 The Acting Regional Director Regional District No. 4 Quezon City S i r : There is returned herewith the docket bearing on the internal revenue tax case of Wack Wack Golf and Country Club (hereinafter referred to as Wack Wack), Mandaluyong, Rizal involving the total amount of P268,909.30 as percentage taxes, surcharge and compromise penalties covering the period from 1953 to 1962, allegedly due from it as an operator of a bar and restaurant. It appears from the records of this case that Wack Wack is a corporation duly organized and registered with the Securities and Exchange Commission. The said corporation does not issue shares of stocks to its members and that membership therein and the right to participation in its assets are acquired and enjoyed by the active members thereof upon payment of a membership fee of P1,000.00 either in cash or in installments. The Articles of Incorporation of Wack Wack provide, among others, "that the purposes for which the said corporation is formed are to foster, promote and conduct legitimate athletic exercises, sports and entertainments of all kinds; to establish, maintain and conduct a club house or club room; to purchase, lease, or otherwise acquire such real and personal property, athletic or other equipment as maybe necessary or convenient in connection with the conduct of the affairs of the corporation; and, generally, to do and perform such acts and things, and to exercise such powers, as are ordinarily done, performed and exercised by social and athletic clubs and associations." To carry out these purposes, Wack Wack established and has been maintaining a bar and restaurant within its premises wherein food and drinks are served. On the basis of the sales realized by the bar and restaurant covering the period from 1953 to 1962, our examiner stationed in that Regional Office made an assessment against in that Regional Office made an assessment against the corporation in the total amount of P268,909.00 as percentage taxes, surcharge, and compromise penalties. The basis of this assessment is that the said bar and restaurant are not operated on a strict non-profit basis. Further, it was found out that the "bar and restaurant is (sic) not operated exclusively for the members of the organization only" and that "catering to non-members is patently demonstrated by the frequency of the affairs being held in the said bar and restaurant . . .". On the other hand, counsel for Wack Wack maintains that the bar and restaurant serve food and drinks "exclusively to its members, as well as to the immediate families of members and to the guests and visitors of such members". He further argues that "the bar and restaurants at all times has been, and still is, being operated by taxpayer on a strictly non-profits basis, i.e., the amount charged for foods and drinks barely cover the expenses for the up-keep and maintenance of the bar and restaurant. The profit, if any, from the sale of foods and drinks, do not inure to the benefit of any individual member or members, such profit being retained to provide for further improvements of the club." The issue to be resolved in this case is whether or not the bar and restaurant owned and operated by Wack Wack are engaged in "business" as this term is contemplated under Section 178 of the National Internal Revenue Code. In the report of re-investigation conducted by the examiner dated March 11, 1964, he proved his allegations in his original report dated March 1, 1963 that "In the course of this investigation it was observed by the undersigned that the said bar and restaurant is (sic) not operated exclusively for the members of the organization only", and "catering to non-members is patently demonstrated by the frequency of affairs being held in the said bar and restaurant, known through the society pages of the daily newspapers" by going twice to the said Club, one alone and then with a companion (a non-member) and in both times, "they were served food at the restaurant without any questions asked." In the cases of CIR vs. Manila Lodge No. 761 of the BPOE (Manila Elks Club) and C.T.A., G.R. No. L-11176, prom. June, 1959; Manila Polo Club vs. B. L. Meer, et al., G.R. No. L-10858, prom. January 27, 1960 and C.I.R. vs. The Club Filipino Inc. de Cebu, G.R. No. L-12719, prom. May 31, 1962, the facts of which are practically similar to the case at bar, the Supreme Court ruled that bar and restaurant owned and operated by a Club such as Wack Wack serving food and drinks exclusively to its members, guests and friends of such members are not considered engaged in business as this term is contemplated under Section 178 of the Tax Code. "The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification should be construed in its plain and ordinary meaning, restricted for profit or livelihood." (C.I.R. vs. Manila Elks Club, supra) cdll In order that a bar and restaurant owned and operated by a Club may not be considered engaged in business, they should serve food and drinks only to its members, guests and friends of such members. In other words, they should be established for the exclusive benefits of the Club. "The bar and restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members." (C.I.R. vs. The Club Filipino, Inc., supra) However, based on the report of investigation of our examiner Wack Wack does not cater services only to its members, guests and friends of such members but also indiscriminately to the public. The worksheet prepared and submitted by him shows that the purchases of food and drinks are so big that it would be impossible to be consumed only by the members of Wack Wack. Wack Wack, therefore, for operating a bar and restaurant catering services to the public indiscriminately cannot be covered by the ruling of the Supreme Court in the aforecited cases. As of now, the bar and restaurant acquire the category of a business establishment contemplated under Section 178 of the Tax Code and the operation of the bar and restaurant is no longer incidental to the objective of the Club. The contention of the counsel for the taxpayer that the profits realized from the bar and restaurant do not inure to the benefit of any stockholder for the reason that Wack Wack is a non-stock corporation is untenable because it cannot be denied that the members thereof benefit from said bar and restaurant in the form of services. "Earnings may inure to members in a manner other than through the distribution of dividends. Thus, where valuable services are rendered to members it may be said that part of the net earnings do inure to the benefit of the members . . . ." (General Contractors' Ass'n of Milwaukee vs. U.S., 202F (2d) 633 (CA 7th, 1963, Mertens Vol. 6, Section 3413) llcd The Tax Code does not provide any exemption from percentage tax on clubs which are operated on a non-profit basis. Analyzing carefully the operations of the bar and restaurant, it was shown that enormous profits from year to year have been realized and this income is being consolidated with the other incomes of Wack Wack. While it is true that the income does not inure to the benefit of the individual stockholder, yet the statement of the resources and application of the funds shows that the profits realized from the operation of the bar and restaurant have been spent for the permanent improvements of the Club, like construction of buildings, land improvements, acquisition of equipment, purchase of furniture and fixtures and all other fixed assets of the corporation. It appears, therefore, very clearly that the club itself is operating on a profit basis. The provisions of the same Code especially Section 27 about income of clubs not inuring to the benefit of the stockholders refers only to exemption from income tax, but not from the percentage tax. Furthermore, the condition of the previous exemption of Wack Wack from the percentage tax was that the services of the bar and restaurant should be limited to the members and their guests. However, the operations of the same show that they have been serving wedding and birthday parties and other social activities wherein a great number of people are admitted. This is a violation of the Articles of Incorporation and the By-Laws of the Club. For violating the condition for which the above tax exemption has been granted, Wack Wack, therefore, loses the benefit of the exemption. In view of all the foregoing, this Office is of the opinion and so holds that Wack Wack is engaged in business as a bar and a restaurant subject to tax under Section 191 of the National Internal Revenue Code. The collection, therefore, of P268,909.30 as percentage taxes, surcharge and compromise penalties covering the period from 1953 to 1962 should be given due course without delay. Very truly yours, (SGD.) BENJAMIN N. TABIOS Acting Commissioner of Internal Revenue