G.R. No. L-12954 February 28, 1961
On 26 and 27 January 1954 the taxpayers asked for reconsiderationof the
COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
ARTHUR HENDERSON, respondent.
PADILLA, J.:
Facts
Arthur H. Henderson is the President of American International Underwriters for the
Philippines, Inc., which represents a group of American insurance companies engaged
in the business of general insurance except life insurance;
o During the years 1948 to 1952, they lived in apartments chosen by his
employer;
o From 1948 to the early part of 1950, they lived at the Embassy Apartments
on Dakota Street, Manila, where they had a large sala, three bedrooms,
dining room, two bathrooms, kitchen and a large porch
o From the early part of 1950 to 1952, they lived at the Rosaria Apartments on
the same street where they had a kitchen, sala, dining room two bedrooms
and bathroom;
o Despite the fact that they were the only two in the family, they had to live
in apartments of the size beyond their personal needs because as
president of the corporation, he and his wife had to entertain and put up
houseguests such as the president of C, V. Starr & Company, Inc., who
spent four weeks in his apartment, Thomas Cocklin, a lawyer from
Washington, D.C., and Manuel Elizalde, a stockholder of AIUPI;
o [important] According to Henderson, were he not required by his
employer to live in those apartments furnished to him, he and his wife
would have chosen an apartment only large enough for them and spend
from P300 to P400 monthly for rental and that of the allowances granted to
him, only the amount of P4,800 annually, the maximum they would have
spent for rental, should be considered as taxable income and the excess
treated as expense of the company
o According to Marie Henderson, his wife, for almost three years, she and
her husband gave parties every Friday night at their apartment for about
18 to 20 people and that their guests were officials of her husband's
employer-corporation and other corporations
In 1952, his wife undertook a trip to New York for which she was granted by his
employer-corporation travelling expense allowance of P3,247.40, which was made at
the behest of his employer to assist its architect in the preparation of the plans for a
proposed building in Manila and procurement of supplies and materials for its use.
According to Arthur Henderson, the said amount should not be considered as part
of taxable income.
In due time the taxpayers received from the Bureau of Internal Revenue assessment
notices and paid the amounts assessed
In the foregoing assessments, the Bureau of InternalRevenue considered as part of
their taxable income:
The taxpayer-husband's allowances for rental, residential expenses,subsistence,
water, electricity and telephone
The bonus paid to him
The withholding tax and entrance fee to the Marikina Gun and Country Club
paid by his employer for his account
travelling allowance of his wife.
foregoing assessment based on the following reasons:
As to allowances for rental and utilities, Arthur did not receive money for
the allowances. Instead, the apartment is furnished and paid for by his
employer-corporation (the mother company of American International), for
the employer corporations purposes. The spouses had no choice but to live
in the expensive apartment, since the company used it to entertain guests, to
accommodate officials, and to entertain customers.
As to the entrance fee, it should not be considered income since it is an
expense of his employer, and membership therein is merely incidental to his
duties of increasing and sustaining the business of his employer.
As to the travelling allowance of his wife, shemerely accompanied him to
New York on a business trip as his secretary, and at the employer-
corporations request, for the wife to look at details of the plans of a
building that his employer intended to construct. Such must not be
considered taxable income.
The Conference Staff of the Bureau of Internal Revenue on5 October 1954
recommended to the Collector of Internal Revenue that the assessments made on
28 November 1953 be sustained except that the amount of P200 as entrance fee
to the Marikina Gun and CountryClub paid for the husband-taxpayer's account
by his employer in 1948
The taxpayers again sought a reconsideration of the denial of their request for
reconsideration
The taxpayers filed in the Courtof Tax Appeals a petition to review the decision
of theCollector of Internal Revenue (C.T.A. Case No. 237).
CTA: Ordered the refund
Taxpayers filed a motion for reconsideration
The Collector of InternalRevenue filed an opposition to their motion for
reconsideration.
On 28 September 1957 the Court denied both motions for reconsideration.
Issue/Holding/Ratio
1. Are the allowances for rental of the apartment furnished by the husband-taxpayer's
employer-corporation, including utilities such as light, water, telephone, etc. and the
allowance for travel expenses given by his employer-corporation to his wife in 1952
part of taxable income?
Section 29, Commonwealth Act No. 466, National Internal Revenue Code, provides:
"Gross income" includes gains, profits, and income derived from salaries, wages, or
compensation for personal service of whatever kind and in whatever form paid, or from
professions, vocations, trades, businesses, commerce, sales, or dealings in property,
whether real or personal, growing out of the ownership or use of or interest in such
property; also from interest, rents dividend, securities, or the transaction of any
business carried on for gain or profit, or gains, profits, and income derived from any
source whatever. (Emphasis ours.)
The taxpayers are childless and are the only two in the family. The quarters, therefore,
that they occupied at the Embassy Apartments and at the Rosaria Apartments
exceeded their personal needs. But the exigencies of the husband-taxpayer's high
executive position, not to mention social standing, demanded and compelled them
to live in amore spacious and pretentious quarters like the ones they had occupied.
 Although entertaining and putting up houseguests and guests of the husband-
taxpayer's employer-corporation were not his predominand occupation as
president, yet he and his wife had to entertain and put up houseguests in their
apartments. That is why his employer-corporation had to grant him allowances for
rental and utilities in addition to his annual basic salary to take care of those extra
expenses for rental and utilities in excess of their personal needs.
Hence, the fact that the taxpayers had to live or did not have to live in the
apartments chosen by the husband-taxpayer's employer-corporation is of no
moment, for no part of the allowances in question redounded to their personal
benefit or was retained by them.
Likewise, the findings of the Court of Tax Appeals that the wife-taxpayer had to make
the trip to New York at the behest of her husband's employer-corporation to help in
drawing up the plans and specificatins of a proposed building, is also supported by
the evidence. No part of the allowance for travelling expenses redounded to the
benefit of the taxpayers. Neither was a part thereof retained by them. The fact that
she had herself operated on for tumors while in New York wa but incidental to her
stay there and she must have merely taken advantage of her presence in that city to
undergo the operation.
2. Should the total amount of P3,249.32 "for manager's residential expense" in 1948 be
treated as rentals for apartments and utilities? Yes, they should not form part of the
ratable value subject to tax.
The taxpayers claim that the Court of Tax Appeals erred in considering the amounts
of P1,400 and P1,849.32, or a total of P3,249.32, for "manager's residential expense" in
1948 as taxable income despite the fact "that they were of the same nature as the
rentals for the apartment, they being expenses for utilities, such as light, water and
telephone necessarily incidental to the apartment furnished to him by his employer."
The taxpayers' claim is supported by the evidence. The computation made by the
taxpayers is correct. Adding to the amount of P29,573.79, their net income per return,
the amount of P6,500, the bonus received in 1948, and P4,800, the taxable ratable value
of the allowances, brings up their gross income to P40,873.79. Deducting therefrom
the amount of P2,500 for personal exemption, the amount of P38,373.79 is the amount
subject to income tax. The income tax due on this amount is P6,957.19 only. Deducting
the amount of income tax due, P6,957.19, from the amount already paid, P8,562.47
(Exhibits B, B-1, C), the amount of P1,605.28 is the amount refundable to the
taxpayers. Add this amount to P563.33, P1,294.00, P354.00 and P2,154.00, refundable
to the taxpayers for 1949, 1950, 1951 and 1952 and the total is P5,986.61.
Rodriguez v CIR
FACTS:
Pursuant to RA 333, the Govt sued the petitioners for expropriation of property. Court ruled in
favor of the Govt and ordered them to pay just compensation. The Govt and petitioners then
entered into a compromise agreement, part of which was that 625k of the compensation will be
issued in government bonds.
On March 1, 1951, pet filed ITR for 1950 which showed a loss of 17.9k, and which did not
include the 625k Govt bonds issued, believing it was tax exempt. BIR examined the return and
assessed pets of deficiency income tax of 63.8k. Petitioner protested and did not pay. CIR sought
the payment of the deficiency plus 5% surcharge and 1% monthly interest.
Pet offered to pay 30.6k as full settlement of deficiency. CIR rejected the offer, so petitioner filed
case with CTA. The said court affirmed the assessment.
Issue: WON the portion of the payment of the purchase price paid in government bonds
should be included - YES
RATIO:
The relevant provision from RA 333:
SEC. 9. The President of the Philippines is authorized to issue, in the name and behalf of the Republic of
the Philippines, bonds in an amount of twenty million pesos, the proceeds of which shall be used as a
revolving fund for the acquisition of private estates, the subdivision of the area, and the construction of
streets, bridges, waterworks, sewerage and other municipal improvements in the Capital City of the
Philippines.
The bonds so authorized to be issued shall bear such date and in such form as the President of the
Philippines may determine and shall bear such rate of interest and run for such length of time as may be
determined by the President. Both principal and interest shall be payable in Philippine currency or its
equivalent in the United States currency, in the discretion of the Secretary of Finance, at the Treasury of
the Philippines, and the interest shall be payable at such periods as the President of the Philippines may
determine.
Said bonds shall be exempt from taxation by the Government of the Republic of the Philippines or by any
political or municipal subdivisions thereof, which fact shall be stated upon their face, in accordance with
this Act, under which the said bonds are issued.
Petitioners argue that the inducement to accept the government bonds was the condition that
those would be tax free, that in accepting them, they would also not need to pay income tax.
They also said that the provision was inserted as further inducement for private land owners in
the new capital site to part with their property in favor of the govt. They also said a subsequent
law RA 1499 did not consider compensation as income for the purposes of income tax.
SC: Exemption from taxation is never presumed. Citing the CTA decision: petitioner is taxable
on the income derived from the sale of property to the Government. The fact that a portion of
the purchase price was paid in tax exempt bonds does not operate to exempt said income from
income tax. Income from the sale of the land are different from the bonds. They ar two different
taxable items. Exemption of one does not exempt the other.
The law involved does not refer to any exemption of income derived from sale of expropriated
property. Even assuming that the City Planning Commission assured pet that portion of the
price is tax exempt, it won't bind the Govt without statutory sanction.
Therefore, the CIR is correct in assessing the deficiency income tax. Income
from expropriation proceedings is income from sales or exchange, and
therefore, TAXABLE.
Jose and Juana GONZALS v CTA and Collector of Internal Revenue
No. L-14532 & 14533, 26 May 1965, Bengzon, CJ.
Plaintiff: Jose and Juana are brother and sister. Both are co-heirs of a tract of a land (871 sqm)
located in Caloocan, Rizal. Said land is subject to expropriation proceedings.
Defendants: CTA and the Collector of Internal Revenue. Appellants are contesting the decision
of CTA favoring the Collector
FACTS
Jose and Juana are co-heirs (1/6 share each). Their inherited land was expropriated
and the Court fixed the price for just compensation at P1.50 per sqm. Court also
ordered payment of interest at the legal rate of 6% from the January 25, 1947 (date
when Govt took possession of the property) to the date of payment on October 31,
1954.
Total amount paid by govt ...1,307,973.00
Less Acquisition cost of land.. 28,000.00
Capital Gain ....... 1,279,973.00 --- 1,279,973.00/6=213,328.82
as capital gain for each sibling
6% per annum Interest 535,587.70 ---- 535.587.70/6 =
89,305.62 as interest for each sibling
A tentative return was prepared and filed for each of the 2 petitioners based on the
CG (213,328.82 ) and ordinary income (89,305.62 ) and each petitioner was assessed
86,166.
Government paid the petitioners through the Peoples Homesite and Housing
Corporation sometime in Oct 1954 and the last check was delivered on November 4,
1954.
However the sum of 532,234.70 was retained by the Hosing Corporation and turned
over the Collector 526,007.00 representing income taxes reportedly due and owing
from the 6 co-heirs. The Siblings were credited 86,166.00 as payment of their income
tax. Official receipts were issued dated Nov 19, 1954
Feb 29, 1956, Juana wrote the Collector seeking the refund of 24,426 allegedly
representing excess payment of income taxes for 1954. Contends that the amount of
89,305.62, which the Collector assessed as ordinary income should be considered as
capital gain.
November 5, 1956-Jose also wrote a letter requesting the same refund as Juana
Collector denied the requests. It was then submitted to the CTA, which also denied
the request.
o In the CTA, the siblings amended the amount of refund to 86,166.00 (the
total amount which was credited to them)
ISSUES/HELD
1.WoN petitioners claim for refund of the total amount of 86,166.00 may be properly
entertained? YES
2. WoN the sum of 89,809.61 which each of the petitioner received as interest on the
value of the land expropriated is taxable as ordinary income? YES
RATIONALE
1. Procedural-not our topic in the syllabus
Tax Code requires that before a suit or proceeding for the refund of any
internal revenue tax can be maintained in any court, a written claim for its
refund shall be filed with the Collector of Internal Revenue before filing the
action in court and before the expiration of two years from the date of
payment of the taxed to be refunded
Court finds no merit the petitioners contention:
i. no proof on record of the refund claim
ii. assuming that it was duly filed on Nov. 24, 1956, claim is only for
Juana, no mention of Jose
iii. refund claim does not set forth in detail the facts and grounds
upon which it was based and failed to apprise the respondent of
her grounds for raising her claim from 24k to 86k or 8 days after
the filing of her amended petition before the respondent court on
November 16, 1956 and a few days after the two-year period.
iv. Juanas 11th hour modification was made on Nov 24, 1956
x x-Definition of the Term Consignees or
Agent. For purposes of this Ordinance, a
consignee of agent shall mean any person,
association, partnership, company or
corporation who acts in the place of
another by authority from him or one
entrusted with the business of another or
to whom is consigned or shipped no less
than 1,000 cases of hard liquors or soft
drinks every month for resale, either retail
or wholesale.
2. The court held in Gutierrez v CTA:
the acquisition by the Government of private properties through the
exercise of the power if eminent domain, said properties being justly
compensated, is embraced within the meaning of the term sale or
disposition of property
and the definition of gross income laid down by Section 29 of the Tax Code of the
Philippines.
Transfer of property through condemnation proceeding is a sale or exchange and that
profit from the transaction constitutes capital gain
Interest does not form part of the price paid by the Government in condemnation
proceedings; and may not be treated as part of capital gain.
US Supreme Court v CIR: whether one calls is interest on the
value or payments to meet the constitutional requirement of
just compensation. It is income paid to the taxpayers in lieu of
what they might have earned on the sum found to be the
value of the property on the day the property was taken. it is
not a capital gain upon an asset sold.
The Court therefore sees no reason to impute error to the opinion of the CIR and
the CTA that the interest paid was ordinary income, bearing in mind that the Tax
Code provides:
Section 29. Gross Income(a) General DefinitionGross income,
includes gains, profits, and income derived from xxx interest,
rents, dividend, securities, or the transactions of any business
carried on for gain or profit, or gains, profits and income
derived from any source whatever
CIR and CTA decisions affirmed
Gutierrez v. CTA G.R. No. L-9738 & L-9771.
Date: May 31, 1957
TOPIC IN SYLLABUS: Gross income; Income from dealings with property
SUMMARY: The land of spouses Gutierrez was subject to expropriation proceedings. A portion of
the just compensation was withdrawn from the court in 1949, and the remainder was paid in
1950. The CIR demanded tax and penalties in 1953. The spouses contended that just
compensation from expropriation is not taxable. Court held that expropriation is considered a
sales or exchange, therefore taxable. Other rulings below.
HOW THE CASE REACHED THE SC: Appeal from ruling of CTA.
FACTS:
Maria Morales was the registered owner of an agricultural land located in Mabalacat,
Pampanga. The Republic of the Philippines, pursuant to the terms of the Military Bases
Agreement, instituted condemnation proceedings in the CFI of Pampanga, for the purpose of
expropriating the lands for the expansion of the Clark Field Air Base. Blas Gutierrez, the
husband, was also impleaded. At the commencement of the action, the plaintiff RP deposited
with the court the sum of P156,960, which was provisionally fixed as the value of the lands
sought to be expropriated, in order that it could take immediate possession of the same. On
January 27, 1949, by order of the Court, the sum of P34,580 was paid to the spouses out of the
original deposit. On November of the same year, the curt fixed as just compensation
P2,500/hectare of land in some portions and P3,000 in others. The total amount due Morales
then was P94,305.75. The court also disapproved claims of consequential damages and in order
to avoid further litigation, a compromise agreement was entered into on January 1950,
modifying the earlier decision and ixing just compensation at the rate of P25,000 for all of the
portions of the land without distinction. Sometimes in 1950, Morales received P59,789.75,
representing the balance of the just compensation after deducting the earlier amount
paid to them.
In a notice of assessment dated January 28, 1953, the Collector of Internal Revenue
(CIR) demanded from petitioners P8,841 as alleged deficiency income tax for the year 1950
inclusive of surcharges and penalties. Morales, thru counsel, requested the CIR to withdraw and
reconsider the assessment saying that (1) the amount they received cannot be considered
income derived from sale or disposition of property referred to by Sec. 29 of the Tax Code as it
was just compensation received from the government and therefore not taxable; (2) even
granting that it was, the compensation received was for the year 1949 and not 1950 as the
payment was more than 25% of the total price, therefore the assessment was barred by the three-
year prescription; (3) the spouses did not realize any profit as there were improvements on the
land and the value of peso has depreciated since the acquisition (4) granting that the assessment
was correct, the omission was due to an honest mistake. The CIR rejected the claims. Appeal
was made to the CTA who ruled that the tax was proper but the surcharge was unwarranted as
there was no bad faith. Hence, this appeal.
PETITIONERS ARGUMENT: See enumeration of four points above.
RESPONDENTS ARGUMENT: the imposition of the 50% surcharge was in accordance with
the Tax Code; only American citizens are exempted from paying the income tax based on the
Bases Agreement; the cost of acquisition and the selling price shall be taken into account in
calculating the tax without qualification as to the currency; the income should be calculated for
the year 1950, having been paid in 1950.
ISSUES/HELD:
1. WON income from expropriation should be deemed as income from sale and any
profit therefrom should be considered as capital gains subject to income tax.
There is no question that the property expropriated being located in the
Philippines, compensation or income derived therefrom ordinarily has to be
considered as income from sources within the Philippines and subject to the
taxing jurisdiction of the Philippines. However, it is to be remembered that
said property was acquired by the Government through condemnation
proceedings and appellants stand is, therefore, that same cannot be
considered as sale as said acquisition was by force, there being practically
no meeting of the minds between the parties. However, authorities in the
US on the matter share the views of the CIR. In the cases of Comt. Int.
Revenue v. Kieselbach, David Brown v. Comm and Lapham v. US, income
from expropriation proceedings have been considered as sales or exchange
and therefore taxable.
2. WON under the circumstances, the property should be exempt from tax.
Although the Tax Code provides for exemption under treaty, the bases
Agreement only expressly provides for tax exemption for American citizens
in the Philippines, with no mention as to compensation paid for privately
owned lands.
3. Won the CIR is barred by the statute of limitations.
Although the petitioners did receive the P34,000 in 1949, the same could not
be considered income for that year as they were still the owners of the
property subject to condemnation proceedings and the P34,000 was not
paid to them but was merely deposited to the court and withdrawn by
them.
4. WON the capital gain from the expropriation is merely nominal and not subject to
income tax.
Sec. 35 of the Tax Code expresses that only the fair market price or value of
the property as of the date of the acquisition thereof should be considered in
determining the gain or loss sustained by the property owner when the
property was disposed, without taking into account the purchasing power
of the currency used in the transaction. The acquisition cost was P28,291, the
purchase prie was P94,304, and there was undeniably a capital gain which
should be taxed.
5. WON the imposition of surcharge was proper.
No, there is no evidence to show that petitioners acted in bad faith 9as held
by the CA).
Decision affirmed.
Commissioner v. Rufino et al and CTA (1987)
Facts:
Private respondents were majority stockholders of both the Old and New Corporations
Old Corporation:
The now defunct Eastern Theatrical Company Inc
Organized: 1934; Period: 25 years to end on 1959.
Original capital stock: P500,000 increased to P2,000,000
Shares: 200,000 at P10/share
To engage in business of operating theatres, opera houses, places of amusement and other
related business enterprises
President: Ernesto Rufino
New Corporation:
Eastern Theatrical Co Inc
Organized: Dec. 8, 1958; period: 50 years
Authorized capital stock: P200,000
Par value: P10/share
Same kind of business as Old Corporation
General Manager: Vicente Rufino
December 17, 1958: stockholders of the Old Corporation had a meeting to provide for the
continuation of its business after the end of its corporate life. Passed a Resolution authorizing
the Old Corporation to merge with the New Corporation by transferring its business, assets,
goodwill, and liabilities to the latter, which in exchange would issue and distribute to the
shareholders of the Old Corporation one share for each share held by them in the said
Corporation.
Jan. 9, 1959: A Deed of Assignment, made retroactive to Jan. 1, 1959, was signed.
Jan. 12, 1959: In a meeting of the stockholders of the New Corporation, they approved both the
resolution and deed of assignment. They also increased the capitalization of the New
Corporation to P2,000,000 divided into 200,000 shares at P10 each.
March 5, 1959: Registered the increase of capitalization which was approved by the SEC on
August 20
BIR: the merger was not for a bona fide purpose but was to avoid liability for the capital gains
tax on the exchange of the old for the new shares of stock
CTA: reversed BIR as there was a valid merger
Whether there is taxable gain derived by the private respondents from the questioned
transaction [NO]
There was a valid merger although the actual transfer of the properties subject of the Deed of
Assignment was not made on the date of the merger cause that was impossible. The Old
Corporation had to surrender its net assets first to the New Corporation before the latter could
issue its own stock to the shareholders of the Old Corporation because the New Corporation
had to increase its capitalization first. Though the adoption of the resolution, the registration
and its subsequent approval all took place after the merger, they were deemed part and parcel
of, and indispensable to the validity and enforceability of the Deed of Assignment.
The intention and reason why the Deed of Assignment was made retroactive to January 1, 1959
was so that all transactions set forth in the merger agreement shall be deemed to be taking place
simultaneously on January 1, 1959, when the Deed of Assignment became operative.
Whether the merger was undertaken for bona fide business purposes and not merely to
escape taxation [YES, bona fide]
The basic consideration is the purpose of the merger, as this would determine whether the
exchange of properties involved therein shall be subject or not to the capital gains tax.
The Court must seek and ascertain the intention of the parties in the light of their conduct
contemporaneously with, and especially after, the questioned merger pursuant to the Deed of
Assignment of January 9, 1959.
It is clear that the purpose of the merger was to continue the business of the Old Corporation,
whose corporate life was about to expire, through the New Corporation to which all the assets
and obligations of the former had been transferred. The New Corporation continues to operate
the places of amusement originally owned by the Corporation.
It was actually made necessary by the law the Old and New Corporation undertake a merger
since under the original provisions of the old Corporation Law, which was in effect when the
merger agreement was concluded in 1959, it was not possible for a corporation, by mere
amendment of its charter, to extend its life beyond the time fixed in the original articles and was
specifically prohibited in Sec 18.
The procedure for such merger was prescribed in Section 28 1/2 of the old Corporation Law
which, although it did not expressly authorize a merger by name. The transaction contemplated
in the old law covered the second type of merger defined by Section 35 of the Tax Code as "the
acquisition by one corporation of all or substantially all of the properties of another corporation
solely for stock," which is precisely what happened in the present case.
The fact is that the merger had merely deferred the claim for taxes, which may be asserted by
the government later, when gains are realized and benefits are distributed among the
stockholders as a result of the merger.
CTA DECISION IS AFFIRMED IN FULL.
Tuason v Lingad
July 31, 1974 / CASTRO, J.
Petition for review of the decision of the CTA
FACTS:
In 1948, petitioner Antonio Tuason, Jr. inherited from his mother several tracts of land,
among which were 2 contiguous parcels on Pureza and Sta. Mesa streets in Manila
When petitioner's mother was still alive, she had these 2 parcels subdivided into 29 lots. 28
were allocated to their then occupants who had lease contracts with the petitioner's
predecessor; contracts expired on Dec 31, 1953.
Lot 29 was not leased to any person
After the petitioner took possession of the mentioned parcels in 1950, he instructed his
attorney-in-fact (Araneta) to sell them
28 lots were sold w/o difficulty (occupants bought them on a 10-yr installment basis); Lot
29 could not be sold immediately due to its low elevation, but was nevertheless sold
after filling, subdivision and pavement were done. Araneta did not employ any
broker nor did he put up ads in the matter of the sale thereof.
In 1953 and 1954, petitioner reported his income from the sale of the small lots as long term
capital gains. On May 15, 1957, Collector of Internal Revenue (ColIR) upheld
petitioner's treatment of his gains from the said sale of small lots, against a contrary
ruling of a revenue examiner
In his 1957 tax return, the petitioner, as before, treated his income from the sale of the small
lots as capital gains and included only 1/2 thereof as taxable income. Petitioner
deducted the real estate dealer's tax he paid for 1957. It was explained that the
payment of the dealer's tax was on account of rentals received from the mentioned 28
lots and other properties of the petitioner.
On the basis of the 1957 ColIR opinion, the revenue examiner approved petitioner's
treatment of his income from the sale of the lots in question. Chief of the BIR
Assessment Dept advanced the same opinion and was concurred in by the
Commissioner of Internal Revenue (CIR)
However, in 1963, CIR reversed himself and considered petitioner's profits from the sale of
the lots as ordinary gains. Petitioner was then advised to pay deficiency income tax
for 1957 (PhP31,095.36)
Petitioner's MR was denied. CTA rejected petitioner's appeal (as he was engaged in the
business of leasing the lots he inherited from his mother as well other real properties,
 his subsequent sales of the mentioned lots cannot be recognized as sales of capital
assets but of "real property used in trade or business of the taxpayer.") and ordered
him to pay surcharges and interest. Hence this petition.
ISSUE/HOLDING/RATIO: Whether the properties petitioner inherited and subsequently sold
are capital assets. NON-CAPITAL ASSETS. As such, gains realized are ORDINARY GAINS.
CTA judgment affirmed with modification (order to pay surcharges and interest eliminated
since petitioner was found to have relied upon opinions of BIR officials in good faith)
The term "capital assets"1 includes all the properties of a taxpayer w/n connected with his trade
or business, except: (1) stock in trade or other property included in the taxpayer's inventory; (2)
property primarily for sale to customers in the ordinary course of his trade or business; (3)
property used in the trade or business of the taxpayer and subject to depreciation allowance;
and (4) real property used in trade or business. If the taxpayer sells or exchanges any of the
properties above-enumerated, any gain or loss relative thereto is an ordinary gain or an ordinary
loss; the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital
gain or a capital loss. Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer
(other than a corporation) from the sale or exchange of capital assets held for >12mos, only 50%
of the net capital gain shall be taken into account in computing the net income.
When the petitioner obtained by inheritance the parcels in question, transferred to him was the
right to receive and enjoy the fruits of the business and property which the decedent had
established and maintained. Moreover, the record discloses that the petitioner owned other real
properties which he was putting out for rent, from which he periodically derived a substantial
income, and for which he had to pay the real estate dealer's tax. In fact, as far back as 1957 the
petitioner was receiving rental payments from the mentioned 28 small lots, even if the leases
executed by his deceased mother thereon expired in 1953. Under the circumstances, the
petitioner's sales of the several lots forming part of his rental business cannot be characterized as
other than sales of non-capital assets.
The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not
deserve a different characterization for tax purposes. The following circumstances in
combination show unequivocally that the petitioner was, at the time material to this case,
engaged in the real estate business: (1) the parcels of land involved have in totality a
substantially large area, nearly seven (7) hectares, big enough to be transformed into a
subdivision, and in the case at bar, the said properties are located in the heart of Metropolitan
Manila; (2) they were subdivided into small lots and then sold on installment basis (this manner
of selling residential lots is one of the basic earmarks of a real estate business); (3) comparatively
valuable improvements were introduced in the subdivided lots for the unmistakable purpose of
not simply liquidating the estate but of making the lots more saleable to the general public; (4)
the employment of Araneta, petitioner's attorney-in-fact, for the purpose of developing,
managing, administering and selling the lots in question indicates the existence of owner-realty
broker relationship; (5) the sales were made with frequency and continuity, and from these the
petitioner consequently received substantial income periodically; (6) the annual sales volume of
the petitioner from the said lots was considerable; and (7) the petitioner, by his own tax returns,
was not a person who can be indubitably adjudged as a stranger to the real estate business.
Under the circumstances, this Court finds no error in the holding that the income of the
petitioner from the sales of the lots in question should be considered as ordinary income.
1
NIRC (C.A. 466, as amended) defines the term "capital assets" as follows:
(1) Capital assets. The term "capital assets" means property held by the taxpayer (whether or
not connected with his trade or business), but does not include stock in trade of the taxpayer or
other property of a kind which would properly be included in the inventory of the taxpayer if
on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or property, used in the trade or
business, of a character which is subject to the allowance for depreciation provided in subsection
(f) of section thirty; or real property used in the trade or business of the taxpayer.
ANTONIO PORTA FERRER, vs. (COLLECTOR) now COMMISSIONER OF INTERNAL
REVENUE
(G.R. No. L-16021; August 31, 1962; Regala, J.)
Topic and Doctrine:
Net Capital Gain (Loss)
Taxation; Captial and Ordinary Gains Taxes; Sale of Business Assets; Necessity of Ascertaining
Price Received for each Asset. - As the sale of the bakery in question was not a single asset but of
individual assets that made up the business, it was incumbent upon the owner to point out what
part of the price he had received could be fairly attributed to each so that the capital and/or
ordinary gains taxes properly payable upon the sale of the business could be ascertained. His
failure to do so is sufficient reason for denying his petition for refund of taxes he paid.
Facts:
Petition to review the decision of the CTA denying Ferrer's claim for refund against the CIR.
Ferrer was the sole proprietor of the La Suiza Bakery from Oct 16, 1951 Sep 15, 1955, when he
sold the same to Juan Pons for P100,000. The assets for the bakery consisted of accounts
After deducting the total book value of the assets and the incidental expenses from the gross
selling price, petitioner filed on Feb 14, 1956 his income tax return, showing a net profit of
P19,678.09 as having been realized from the sale of the bakery. On the basis of this amount, he
paid P2,439.00 as income tax on Feb 15, 1956.
Petitioner later requested to refund to him P2,030.00, claiming that the bakery was a capital asset
which he had held for more than twelve months, so that the profit from its sale was a long term
capital gain, and therefore, only 50 per cent of it was taxable under the NIRC. When no action
was taken by respondent on his request, petitioner filed a petition for refund in the CTA.
Tax Court: sale of the bakery did not constitute a sale of a single asset but of individual assets,
some of which were capital assets while others were ordinary assets. But since petitioner failed
to show what portion of the selling price of the bakery was fairly attributable to each asset, the
Tax Court held that it could not ascertain the capital and/or ordinary gains taxes properly
payable upon the sale of the business. For this reason, it denied petitioner's claim for refund.
Issue:
WON Ferrer is entitled to a claim for refund? NO
WON the sale of the La Suiza Bakery was a sale of a capital asset so that the profits derived from
the sale is taxable up to 50%only, considering that petitioner owned it for more than twelve
months, or whether the business is to be comminuted into its component parts, each part to be
tested against the definition of a capital assets in the Tax Code. NO
Held:
SC agrees with Collector
Petitioners arguments:
Tax Court erred in holding that he had made a profit of P19,678.09 from the sale of the bakery, upon
which amount the income tax was based.
The business had liabilities amounting to P19,183.01 which, if deducted along with the book 1. Petitioner Ursula Calasanz inherited agricultural land in Rizal. Said land was
value of the assets and the incidental expenses from the selling price of P100,000.00, would show developed and sub-divided into lots which were sold to the public at a profit.
a profit of P495.05 only. Petitioners in their ITR disclosed a profit of P31K from the sale of the lots and reported
50 percent thereof as taxable capital gains.
SC: Computation of profit cannot be taken up in this appeal because the same was neither raised in the
Tax Court nor made within the issues of the pleadings of the parties (Sec. 19, Rule 48, ROC). Only issues
2. Respondent CIR audited the return and adjudged petitioners as engaged in the real
of WON Tax Court had jurisdiction over this case and WON the sale of the bakery was a sale of capital
estate business for which they should be taxed real estate dealers fixed tax,
asset or of individual assets comprising the business.
compromise penalty tax, deficiency income tax, and interest.
Northern Motors, Inc. v. Prince Line: The rule is well settled that no question will be considered
by the appellate court which has not been raised in the court below. When a party deliberately 3. Petitioner appealed the CIRs decision at the CTA which ruled in favour of CIR.
adopts a certain theory, and the case is tried and decided upon the theory in the court below, he
will not be permitted to change his theory on appeal, cause to permit him to do so would be 4. Petitioner argues: the inherited land is a capital asset within the meaning of Section
unfair to the adverse party. 34.a.1 of the Tax Code and that an heir who liquidated his inheritance is not engaged
in the real estate business and should therefore be given preferential tax treatment.
Sale of the business known as "La Suiza Bakery" was a sale not of the individual assets comprising the Petitioners argue that they were only trying to liquidate the property they inherited
same but of an entire, single asset which, under the law, is a capital asset. and that it was difficult to sell the tract of land as a whole, which is why they
SC: Section 34 of the Tax Code provides in part:
subdivided it. They also developed it and added lights, streets, gutters, drainage etc to
Capital gains and losses. (a) Definitions. As used in this Title
make it easier to sell.
(1) Capital assets.-The term "capital assets" means property held by the taxpayer
(whether or not connected with his trade or business), but does not include, stock in
trade of the taxpayer or other property of a kind which would properly be included in 5. Respondent argues: petitioners are engaged in real estate business since they have
the inventory of the taxpayer if on hand at the close of the taxable year, or property been involved in a SERIES of real estate transactions pursued for PROFIT. Even if the
held by the taxpayer primarily for sale to customers in the ordinary course of his trade property was originally an inheritance, the consequent acts of petitioners developing
or business, of property used in the trade or business, of a character which is subject to and selling the lots constituted doing business for which they should pay the
allowance for depreciation provided in subsection (f) of section thirty; or real property appropriate tax.
used in the trade or business of the taxpayer.
xxx xxx xxx
Issue:
(b) Percentage taken into account. In the case of a taxpayer, other than a corporation,
only the following percentage of the gain or loss recognized upon the sale shall be 1. WON petitioners are real estate dealers? YES.
taken into account in computing net capital gain, net capital loss, and net income.
(1) One hundred per centum if the capital asset has been held for not more than twelve
months; 2. WON the gains from the selling of the lots are taxable in full as ordinary income or as
(2) Fifty per centum if the capital asset has been held for more than twelve months. capital gains taxable at capital gain rate? TAXABLE AS ORDINARY INCOME.

Tax rates are graduated upwards as the total amount of income increases. But capital assets are Held:
generally held for a period in excess of a year. When held for more than a year, the profit or loss
realized is reported for tax purposes only in the year that the asset was sold or exchanged even 1. Sec. 34.a.1 provides that capital assets means property held by the taxpayer
though the increment might have developed over several years or was the result of years of EXCLUDING:
effort. Since the gain is taxed all in one year, a higher rate of tax would necessarily be paid be
included; similarly, only a limited amount of any loss than if a part of the gain were reported a. Stock in trade of the tax payer or other property of a kind which would
each year the asset was held. In an attempt to compensate for this, only a percentage of the gain properly be included in the inventory of the tax payer if on hand at the
on such sales is required to can be deducted in the year in which realized. (Alexander, Federal
close of the taxable year
Tax Handbook, p. 411, 1959 ed.)

Dispositive: b. Property held by the taxpayer primarily for sale to customers in the
WHEREFORE, the decision of the Court of Tax Appeals is hereby affirmed, with costs against ordinary course of business
the petitioner.
c. Property used in the trade or business of a character which is subject to
allowance for depreciation
Calasanz v CIR
d. Real property used in the trade or business of the tax payer.
Fernan, 1986

Facts:
2. SC notes that the definition of capital assets is negative in nature, i.e., it refers to those
not among the exceptions. The court also said that there is no rigid rule or formula for
determining whether property is capital assets.

3. A property initially classified as a capital asset may thereafter be treated as an

ordinary asset.

4. In the case at bar, the court is convinced that the development of the property and the
subsequent sale constitutes doing business and that the petitioners are therefore real
estate dealers. The court notes that the improvements of the lots reached P170k when
the cost of the land is only P4k.

5. The court, citing Ehrman v Commisisoner, held that liquidation of inherited property
does not preclude a determination that the owners of the property are doing business
with regard to the inherited property.