Taxma Iii D-H

TAX ON MERGERS AND ACQUSTONS PART D to H
1
BIR RuIing No. DA-387-2008
June 24, 2008

MSSNG

BIR RuIing No 136-96
December 4, 1996

Facts:

Kawasaki Motors owns an industrial land in Muntinlupa. The lot is located within the vicinity
of a railroad near the Tuklas Compound with a zonal value of P1600 per sqm. Tuklas
Compound is classified as residential land.

Kawasaki then sold those 2 parcels of land to K Realty Corp for P41.8M or P1950 per sqm.
Kawasaki paid the 7.5% withholding tax amounting to P3.1M and DST of P627k. However,
when Kawasaki requested for a certification that the documentary stamp has been paid on
the Deed of Sale, the RDO refused to give the certificate and issued 3 assessments. The
assessments were based on a higher tax base.

Issue:

How should the properties be valued for tax purposes?

Ratio:

At P1950 per sqm. The proper tax base is the actual selling price, fair market value, or
zonal value whichever is higher. n the instant case, since there is no strong evidence to
support the contrary view that the actual selling price, fair market value, or zonal value are
higher that P1,950 per sqm, the adverted zonal value should be adopted as the correct
value for all internal revenue tax purposes.

Pursuant to BR Ruling No. 120-95, if no zonal value has been prescribed for a particular
classification of property in one barangay, the zonal value prescribed for the same
classification of real property located in an adjacent barangay of similar conditions shall be
used.

BIR RuIing No. 029-96
February 27, 1996

MSSNG

February 27, 1996

FACTS:

A deed of exchange is executed between brothers Hugo and Prudencio concerning real
estate in Batangas. The exchange was executed voluntarily and without financial
consideration on both parties. Hugo now occupies the lot after Prudencio vacated it when
the latter moved to Manila. The house was built 50 years ago and is now in a very
dilapidated condition. The Municipal assessor of Batangas has not stated any improvement
in the real properties.

ISSUE:

WON the said transaction can be given exemption from the corresponding taxes due?

RATIO:

NO. Capital gains presumed to have been realized from the sale, exchange, or disposition
of real property located in the Philippines classified as capital assets including pacto de
retro sales and other forms of conditional sales, by individuals, including estates and trusts,
shall be taxed at the rate of 5% based on the Gross Selling Price or the Fair Market Value
prevailing at the time of sale, whichever is higher. n this case, both exchanging parties are
subject separately and distinctly to capital gains tax on the FMV or onal value of subject
properties, whichever is higher.

Also, the transaction is subject to DST as it involves a conveyance or deed whereby land is
assigned or transferred

March 15, 1996

FACTS:

A deed of exchange was executed between Spouses Rivera and the Roman Catholic
Bishop involving a parcel of land in Batangas City owned by the Rivera Spouses and 2
parcels of land owned by Roman Catholic Bishop of Lipa city.

Roman Catholic Bishop is tax exempt under existing laus and that the exchange was done
without any financial consideration from either of the parties. The purpose of the exchange
is to build a church on the property of the spouses.

ISSUE:

WON the said transaction is subject to tax?

RATIO:

Capital Gains Tax YES. Capital Gains Presumed to have been realized from the sale,
exchange or other disposition of real property located in the Philippines classified as capital
assets, including pacto de retro sales, and other forms of conditional sales, by individuals,
including estates and trusts, shall be taxed at the rate of 5% based on the gross selling
price or the fair market value prevailing at the time of the sale.

ncome Tax - NO. Normally, income of whatever kind and character of a religios
organization from any of their properties, real or personal, or from any of the activities
conducted for profit, regardless of the disposition made of such income, shall be subject to
2
tax. However, on the part of Roman Catholic Bishop, since the transaction can be
characterized as a single and isolated transaction and in furtherance of the purposes for
which it was organized, its exchange of property is not subject to income tax and
consequently, to the creditable withholding tax.

DST YES.

CIR vs Estate of Benigno Toda
G.R. No. 147188.
September 14, 2004

QUICK SUMMARY:

Toda sold a property to Altanoga. On the same day, Altanoga sold the lot to RM. CR
discovered that the scheme was resorted to so that CC (Toda's Corporation) could avoid
paying the corporate income tax. Toda claims that this is tax planning and therefore
legitimate. SC disagreed and said that the transaction is tainted with fraud and disregarded
the sale to Altanoga.

FACTS:

Cibeles nsurance Corporation (CC) authorized Benigno P. Toda, Jr., President and owner
of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the
two parcels of land on which the building stands for an amount of not less than P90 million.

Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold
the same property on the same day to Royal Match nc. (RM) for P200 million. These two
transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the
same notary public.

For the sale of the property to RM, Altonaga paid capital gains tax in the amount of P10
million.

Bureau of nternal Revenue (BR) sent an assessment notice and demand letter to the CC
for deficiency income tax for the year 1989 in the amount of P79,099,999.22. The ESTATE
of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and
Mario Luza Bautista, received a Notice of Assessment[12] dated 9 January 1995 from the
Commissioner of nternal Revenue for deficiency income tax for the year 1989 in the
amount of P79,099,999.22. The Estate thereafter filed a letter of protest.

CR dismissed the protest stating that a fraudulent scheme was deliberately perpetuated by
the CC wholly owned and controlled by Toda by covering up the additional gain of P100
million, which resulted in the change in the income structure of the proceeds of the sale of
the two parcels of land and the building thereon to an individual capital gains, thus evading
the higher corporate income tax rate of 35%.

CR argued that the two transactions actually constituted a single sale of the property by
CC to RM, and that Altonaga was neither the buyer of the property from CC nor the seller
of the same property to RM. The additional gain of P100 million (the difference between
the second simulated sale for P200 million and the first simulated sale for P100 million)
realized by CC was taxed at the rate of only 5% purportedly as capital gains tax of
Altonaga, instead of at the rate of 35% as corporate income tax of CC. The income tax
return filed by CC for 1989 with intent to evade payment of the tax was thus false or
fraudulent. With the sale being tainted with fraud, the separate corporate personality of CC
should be disregarded. Toda, being the registered owner of the 99.991% shares of stock
of CC and the beneficial owner of the remaining 0.009% shares registered in the name of
the individual directors of CC, should be held liable for the deficiency income tax,
especially because the gains realized from the sale were withdrawn by him as cash
advances or paid to him as cash dividends. Since he is already dead, his estate shall
answer for his liability.

ISSUES:

WON Toda is guilty of tax evasion?

RATIO:

YES. Tax avoidance and tax evasion are the two most common ways used by taxpayers in
escaping from taxation. Tax avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the taxpayer in good faith and at arms
length. Tax evasion, on the other hand, is a scheme used outside of those lawful means
and when availed of, it usually subjects the taxpayer to further or additional civil or criminal
liabilities.[23]
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the
payment of less than that known by the taxpayer to be legally due, or the non-payment of
tax when it is shown that a tax is due; (2) an accompanying state of mind which is
described as being "evil, in "bad faith, "willful,or "deliberate and not accidental; and (3) a
course of action or failure of action which is unlawful.[

All these factors are present in the instant case. t is significant to note that as early as 4
May 1989, prior to the purported sale of the Cibeles property by CC to Altonaga on 30
August 1989, CC received P40 million from RM,[25] and not from Altonaga. That P40
million was debited by RM and reflected in its trial balance as "other inv. Cibeles Bldg.
Also, as of 31 July 1989, another P40 million was debited and reflected in RM's trial
balance as "other inv. Cibeles Bldg. This would show that the real buyer of the
properties was RM, and not the intermediary Altonaga.

The investigation conducted by the BR disclosed that Altonaga was a close business
associate and one of the many trusted corporate executives of Toda. This information was
revealed by Mr. Boy Prieto, the assistant accountant of CC and an old timer in the
company. But Mr. Prieto did not testify on this matter, hence, that information remains to
be hearsay and is thus inadmissible in evidence. t was not verified either, since the letter-
request for investigation of Altonaga was unserved,[28] Altonaga having left for the United
States of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds
support in the admission of respondent Estate that the sale to him was part of the tax
planning scheme of CC. That admission is borne by the records. n its Memorandum,
respondent Estate declared:

The scheme resorted to by CC in making it appear that there were two sales of the subject
properties, i.e., from CC to Altonaga, and then from Altonaga to RM cannot be considered
a legitimate tax planning. Such scheme is tainted with fraud.

Fraud in its general sense, "is deemed to comprise anything calculated to deceive,
including all acts, omissions, and concealment involving a breach of legal or equitable duty,
3
trust or confidence justly reposed, resulting in the damage to another, or by which an undue
and unconscionable advantage is taken of another.

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of
tax to be paid especially that the transfer from him to RM would then subject the income to
only 5% individual capital gains tax, and not the 35% corporate income tax. Altonaga's
sole purpose of acquiring and transferring title of the subject properties on the same day
was to create a tax shelter. Altonaga never controlled the property and did not enjoy the
normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham,
and without business purpose and economic substance. Doubtless, the execution of the
two sales was calculated to mislead the BR with the end in view of reducing the
consequent income tax liability.

n a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted
more on the mitigation of tax liabilities than for legitimate business purposes constitutes
one of tax evasion.

Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated. The incidence of taxation depends upon the substance of a transaction.
The tax consequences arising from gains from a sale of property are not finally to be
determined solely by the means employed to transfer legal title. Rather, the transaction
must be viewed as a whole, and each step from the commencement of negotiations to the
consummation of the sale is relevant. A sale by one person cannot be transformed for tax
purposes into a sale by another by using the latter as a conduit through which to pass title.
To permit the true nature of the transaction to be disguised by mere formalisms, which exist
solely to alter tax liabilities, would seriously impair the effective administration of the tax
policies of Congress.

To allow a taxpayer to deny tax liability on the ground that the sale was made through
another and distinct entity when it is proved that the latter was merely a conduit is to
sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be
disregarded for income tax purposes. The two sale transactions should be treated as a
single direct sale by CC to RM.

CC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The
5% individual capital gains tax provided for in Section 34 (h) of the NRC of 1986[35] (now
6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the
assessment for the deficiency income tax issued by the BR must be upheld.

DISPOSITIVE PORTION:
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision
of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and
SET ASDE, and another one is hereby rendered ordering respondent Estate of Benigno P.
Toda Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles nsurance Corporation
for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.

SIGUION REYNA, MONTECILLO, ONGSIAKO (SRMO) VS CIR
CTA Case No. 6613
August 18, 2005

FACTS:

The law office of SRMO bought 2 office condominium units at the 4
th
and 6
th
floors of
Citibank center, Paseo de Roxas, Makati City for Php53M. Later, SRMO paid P6.9M and
P1.39M as Capital Gains Taxes and Documentary Stamp Tax. These taxes were based on
the zonal value of the condominium units at P92M.

SRMO filed a claim for refund with the CR for the allegedly overpaid DST. t contends that
the zonal values of CR at the time of purchase of the units are no longer reflective of the
correct fair market value of the real properties in Makati City. Due to the financial crisis and
the depressed conditions of the real estate market, the units were sold to SRMO at P37.5k
per sqm or P22.5k less than the zonal valuation of the real property.

ISSUES:

WON the zonal value should be used as basis?

RATIO:

YES. n computing any internal revenue tax, the value of real property shall be appraised,
according toe either the fair market value as determined by the CR or by the fair market
value as shown by the schedule of values of the Provincial and City Assessors, whichever
is higher. Absent any appropriate determination by competent appraisers that the said
zonal valuations of subject property are highly unrealistic, the same may not be arbitrarily
disturbed considering that the determination of the zonal values of real properties requires
utmost scrutiny taking into account several factors affecting the area where the real
property lies.

Petition for review is hereby dismissed.

February 15, 2007

FACTS:

Poblete executed a Deed of Conditional Sale with Winthrop Realty as buyer. At the time the
Deed of Conditional Sale was executed, the buyer paid 15% of the total price. Years later,
the buyer was able to pay the full price and thereafter, a deed of absolute sale was
executed between the parties.

ISSUES:

When should be the zonal value of the property for purposes of computing the CGT be
determined at the time the Conditional Sale was executed or at the time the absolute
sale?

RATIO:

4
At the time the Deed of ConditionaI SaIe was executed. n sales of real property
classified as capital asset and qualified as installment sales for capital gains tax purposes
(where the sum of the down payment and installments received in the year of sale do not
exceed 25% of the contract price) the tax base of the computation of the CGT should be
the zonal value at the time of the execution of the Contract to Sell or Deed of Conditional
Sale and not the zonal value at the time of the execution of the Deed of Absolute sale.

n this case, since the buyer only paid 15% of the price during the first year, the sale is
characterized as sale on the installment plan.

However, if the initial payments exceed 25% of the selling price, the sale is on deferred-
payment basis not on the installment plan.

October 19, 1998

Facts:

Standard Electric owns a property used as a road lot. t wanted to transfer the property to
its affiliate to Wellton Corporation, a realty holding company. However, the transfer is
restricted by PD 1529 Section 50, and the annotation in the title provides that the lot
cannot be alienated to any person without an order from the court where the property is
located.

Issue:

Whether the acquisition cost may be used as the basis in the computation of capital gains
tax and withholding tax and documentary stamp tax on the proposed transfer of the road lot
to the affiliate?

Ratio:

YES. n view of the restrictions imposed by law on the alienability of the said road lot, and
considering further that the said parcel of land is not a marketable piece of property it would
be highly improbable that individuals or corporations would be interested in acquiring the
same. ts just that Wellton, being an affiliate of Standard, owns the adjacent lot that it
became interested in the acquisition of the road lot.

n certain cases, the actual consideration in the Deed of Sale can be an acceptable tax
base, in lieu of the zonal value, in the computation of the CGT and the DST. One of those
cases (provided in RMO No. 41-91) is when the State or any of its instrumentalities in the
exercise of its power of eminent domain, acquires through expropriation proceedings,
private real property for public use upon payment of just compensation. Another instance is
when the land is bought by the government thru a negotiated purchase.

The non-use or non-application of the prescribed zonal valuation under special
circumstance that adversely impacts the value or marketability of a property like in this
case, a deviation from the general rule or guidelines on valuation of such property is always
justified, otherwise, the imposition of an unjust or unreasonable tax or levy amounts to a
confiscation of property without due process and runs afoul of the equal protection clause
of the constitution.

May 11, 1989

Facts:

PEA offered for sale by public bidding 3 parcels of reclaimed lands. Manila Bay
Development Corp (MBDC) won the bid at Php472M. MBDC is now asking the CR for
authority to pay the DST based on the actual consideration of the property acquired by the
corporation through public bidding from the PEA/

Issue:

WON the tax base for the DST is based on the actual consideration?

Ratio:

YES. The tax base recommended for internal revenue tax purposes shall be the zonal
value established in the place where the property is located. Nevertheless, Section 196 of
the Tax Code is clear in stating that the determination of the documentary stamp tax on the
deeds of sale of real property is to be governed by the amount of consideration received.
This provision is undoubtedly in accordance with the jurisprudence that the liability of an
instrument to stamp tax and the amount of the tax, are determined in the form and the face
thereof, and cannot be affected by proof of facts outside of the instrument.

However, the CR is allowed to utilize the true market value as basis of the DST only if the
consideration is incorrectly stated in the deed of conveyance. Hence if the consideration
correctly stated in the deed of sale in the instant case where the same was determined by
public bidding, the use of the true market value or zonal value is not justified. Accordingly in
the instant case, the DST should be based on the actual consideration appearing in the
Deed of Sale

BIR RULING NO. 118-91
June 25, 1991

FACTS:
A property located in San Juan, Metro Manila with an area of 271 square meters
with an assessed value of P59,620.00 for the land and P9,240.00 for the improvements
was formerly registered in the name of "Manuel de las Alas married to Josefina Pea de las
Alas 1/3; and Manuel P. de las Alas, Jr. married to Shirley Wilson-de las Alas, and Celso
P. de las Alas, married to Angelita Kakilala-de las Alas 2/3.
To enable Manuel P. de las Alas, Jr., to engage in agricultural venture, his other co-
owners executed a Deed of Assignment in favor of Manuel P. de las Alas, Jr. covering the
rights, interest and participation of Celso P. de las Alas over the parcel of land and that
TCT No. (492237) -3040 was later on issued in the name of Manuel P. de las Alas, Jr. He
then obtained loans from the Development Bank of the Philippines (DBP) which was
computed at P169,200.00 in November 1980; that the aforementioned property was
mortgaged to the DBP but Manuel P. de las Alas, Jr. failed to settle his obligation, hence,
DBP extrajudicially foreclosed the real estate mortgage. DBP was the highest bidder at
P174,555.93. However, there was no Certificate of Title issued in the name of DBP and the
TCT remained to date in the name of Manuel P. de las Alas, Jr.;
To save the property of which Celso P. de las Alas has a beneficial interest, he
negotiated with the DBP for the redemption of the property and since Celso P. de las Alas
5
will be solely responsible for the redemption, Manuel P. de las Alas, Jr. executed a Deed of
Assignment assigning to Celso P. de las Alas all his rights, interest and participation in the
property including the right to redeem the same. The property was finally redeemed by
Celso P. de las Alas in the amount of P507,300.23. The Deed of Redemption was executed
by DBP on April 3, 1991. cdtech

ISSUES:
1. From what amount will the documentary stamp tax and transfer tax be based;
2. s there capital gains tax involved? f in the affirmative, who will have to shoulder it and
on what amount should it be based?"

RATIO:
1. The capital gains tax is based on the highest bid at the extrajudicial sale. The DST
will also be based on this amount.
The extrajudicial sale in this case is considered "conditional sale" under Section 21
(e) of the Tax Code because it is subject to redemption within one (1) year from such sale.
The capital gains tax will have to be computed at P174,555.93, which is the highest bid at
the extrajudicial sale. Since you were the assignee of the rights and interests on the
property and, on the basis thereof, you have redeemed the property from the DBP, the
transfer of the title to the property in your name could be affected only after your payment
of the capital gains tax (5% of P174,555.93) and documentary stamp tax, based also on
P174,555.93. You need not pay the surcharge and interest hereon considering that under
the facts of the case there will be no late payment of taxes, if paid within thirty (30) days
from receipt hereof. You should present your Deed of Assignment to the Revenue District
Officer of Revenue District No. 31 (Mandaluyong-San Juan) for purposes of the issuance of
the certificate on tax payments, a requirement for the transfer of the title in the Office of the

Addressed to: PhiIippine NationaI Bank

FACTS:
On January 11, 1984, a public auction was held and conducted by the Ex-Officio
Sheriff of Pasig City on the 32 foreclosed properties of your client, Milagros Rillo; that being
the highest bidder of said properties for P503,000.00, a Certificate of Title was issued in
your favor; that said properties are covered by 30 TCTs in Antipolo and 2 TCTs in Cainta,
Rizal or a total of 32 lots; that at the time of foreclosure, the total appraised value of the 30
lots in Antipolo was P265,040.00 representing 86% while the 2 lots in Cainta were
appraised at P120,000.00 representing 14% of the total value of the foreclosed properties;
that due to legal impediments on the 30 lots in Antipolo, registration of the Certificate of
Sale was held in abeyance and cannot be pursued due to the findings of your Credit
Department that the "subject properties are part and parcel of pregnant titles"; that in your
desire to register the Certificate of Title on the 2 remaining lots in Cainta, our Revenue
District Office in Cainta, Rizal assessed your bank the amount of P51,300.00 as capital
gains tax on the whole foreclosed properties including the 30 lots in Antipolo.

ISSUES:
1. Whether or not you may pay capital gains tax on pro-rated basis on the aforesaid 2
lots in Cainta at 14% only on the total assessment of P51,300.00 or the amount of
P7,182.00 instead of the whole amount as assessed.

RATIO:
1. No. Payment of the capital gains tax cannot be made on a pro-rated basis.
n the case of sale of real property effected through public bidding, e.g., judicial
sale, extrajudicial foreclosure sale, both the 5% capital gains tax and the documentary
stamp tax shall be computed based on the highest or winning bid price. (BR Ruling No.
101-89; Revenue Memorandum Order No. 41-91).
n foreclosure sales of mortgaged real properties, the creditor bank is the statutory
seller, representing the owner mortgagor of the real property, so that said bank becomes
liable to pay the capital gains tax due on such foreclosure sale based on the bid price in the
auction sale. The bank, however, could get, reimbursement or recovery of the capital gains
tax payment, if the right of redemption is exercised by the debtor mortgagor or when the
property is sold to any party whatsoever. (BR Ruling Nos. 101-89 and 118-91; RMO 041-
91 par. 2(3)). Moreover, a BR Clearance is required before said properties are transferred
in the name of your bank, pursuant to Section 49 (a)(4) of the Tax Code, as amended by
Executive Order No. 37 which reads as follows:
"No registration of any document transferring real property shall be effected by the
Register of Deeds unless the Commissioner of nternal Revenue or his duly authorized
representatives has certified that such transfer has been reported, and the tax herein
imposed, if any, has been paid." (BR Ruling No. 010-87 date January 14, 1987)
Furthermore, Section 5 (c) of Revenue Memorandum Order No. 44-86 provides that
a BR Clearance shall be issued after payment of the corresponding (i) capital gains tax;
and (ii) documentary stamp tax, if the real property involved was a capital asset in the
hands of the vendor/transferor.

n view of the above considerations and inasmuch as the capital gains tax shall be
based on the highest or winning bid price which in the instant case amounts to
P503,000.00, your request to pay capital gains tax on pro-rated basis, i.e., 14% only on the
total assessment of P51,300.00 or the amount of P7,182.00 instead of the whole amount
as assessed cannot be granted.

Addressed to: Mr. Henry Lee Chuy

FACTS:
Chuy was the purchaser of a delinquent taxpayer's real estate at a tax sale conducted by
the City Treasurer of Dagupan City, and accordingly, he was issued the corresponding
Certificate of Sale; that a deed of final sale will be issued in your favor due to the failure of
the delinquent taxpayer to redeem the property within the reglementary period of one year
from the date of sale; that the Revenue District Office in Calasiao, Pangasinan is set to
collect the 6% capital gains tax and documentary stamp tax on the tax sale on the basis of
the fair market value or zonal valuation of the property, but you objected thereto, because
you believe that the tax should be based on the bid price as in the foreclosure sale of a
mortgaged real property, as provided under Revenue Regulations No. 4-99; that in the tax
sale, the seller is the City of Dagupan, which under the law is exempt from tax; that the City
has a statutory lien on the delinquent property as security for the payment of unpaid real
estate taxes for a period of two (2) years preceding the tax sale

ISSUES:
1. Whether or not the capital gains tax and documentary stamp tax on the tax sale of a
delinquent taxpayer's real estate should be based on the bid price

RATIO:
1. Yes. The capital gains tax and documentary stamp tax on the tax sale of a delinquent
taxpayer's real estate should be based on the bid price.
Since the sale of the realty of the delinquent taxpayer, in the instant case, is the
enforcement by the City of Dagupan of its tax lien for unpaid real estate taxes and is being
6
conducted through public bidding or a public auction sale, this Office is of the opinion as it
hereby holds that the tax base in computing the capital gains tax and documentary stamp
tax on such sale transaction should, as in the case of mortgage foreclosure sale under Act
3135, as amended, be likewise on the highest bid price. Hence, the capital gains tax and
documentary stamp tax due on the said sale of the realty you purchased in the said public
auction sale by the City of Dagupan, Pangasinan, should be computed based on the
highest bid price.

BIR RULING [DA-207-02]
Addressed to: MeraIco Savings & Loan Association, Inc.

FACTS:
MESALA is a non-stock, non-profit savings and loan association duly licensed by the
Bangko Sentral ng Pilipinas (BSP) and registered with the Securities and Exchange
Commission (SEC); that MESALA exists for the purpose of having its members extend
mutual help and financial assistance to one another through the acceptance of
contributions and extensions of loans; that to secure the real estate loans granted to its
members, MESALA requires collateral from the borrower such as real estate properties;
and that in case of default in the payment of the loans, the property set up as collateral of
the loan is foreclosed and eventually sold through public auction.

ISSUES:
1. Whether or not the income derived from the sale of the foreclosed properties by
Meralco Savings & Loan Association, nc. ("MESALA") is exempt from income tax

RATIO:
1. Yes,
Pursuant to Section 5 of Republic Act No. 8367, otherwise known as "An Act
Providing for the Regulation of the Organization and Operation of Non-Stock Savings and
Loan Association," the pertinent portion of which reads:
"Sec. 5. Tax Exemption. An association shall be exempt from payment of tax in respect
of income it receives, including interest on its deposits with any bank; !rovided, however,
That income derived from any of its properties, real or personal, or any activity conducted
for profit, regardless of the disposition thereof, is subject to the corresponding internal
revenue taxes imposed under the National nternal Revenue Code. xxx xxx xxx." only the
income derived from any of its properties, real or personal, or any activity conducted for
profit regardless of the disposition thereof, is subject to the corresponding internal revenue
taxes imposed under the National nternal Revenue Code.

The subject foreclosed properties of MESALA were just collateral and to secure the loans
granted to the members. Considering that MESALA sells the foreclosed properties not as a
separate activity that is conducted for profit, but rather in the ordinary or normal course of
its savings and loan association business to recoup the amount loaned, the gain, if any,
from such sales is exempt from taxes. There is, therefore, no basis in imposing the capital
gains tax under Section 27(D)(5) of the 1997 Tax Code, or the expanded withholding tax
required to be withheld under Sec. 2.57-2(J) of Revenue Regulations No. 2-98, as
amended.

Accordingly, any income derived from the sale of the foreclosed properties by MESALA is
exempt from the income tax under Sec. 27(A) of the Tax Code of 1997 and consequently
from the creditable withholding tax under Revenue Regulations No. 2-98, as amended, and
also from the capital gains tax under Section 27(D)(5) of the same Code. However, the sale
of the foreclosed properties will be subject to the documentary stamp tax based on the
highest or winning bid price.

aniqued & aniqued

FACTS:
JL is a corporation engaged in business as a real estate developer. On July 28,
1998, JL, as a lender-mortgagee, entered into a Loan Agreement with Real Estate
Mortgage ("Loan Agreement") with Philippine Women's University ("PWU") and Unland
Resources Development Corporation ("Unlad") as borrowers-mortgagors. Pursuant to the
Loan Agreement, Unlad mortgaged in favor of JL three (3) parcels of land ("Mortgaged
Property") as security for Unlad and PWU's indebtedness to JL in the amount of P210
million. Unlad and PWU, however, defaulted on their obligations under the Loan
Agreement, which prompted JL to file a Petition for Extrajudicial Foreclosure of the
Mortgaged Property.
On September 12, 2002, the City Sheriff conducted an extrajudicial foreclosure
sale of the Mortgaged Property where JL won as the highest bidder with a bid of P150
million for the Mortgaged Property.
On September 20, 2002, the City Sheriff issued a Certificate of Sale in favor of
JL as the highest bidder during the foreclosure sale. On October 7, 2002, JL paid the
amount of P2.25 million representing DST on the extrajudicial foreclosure sale of the
mortgaged property. On October 24, 2002, the Certificate of Sale was registered with the
Registry of Deeds of Quezon City and annotated on the TCTs covering the Mortgaged
Property. A mortgagor whose property is sold pursuant to an extrajudicial foreclosure sale
has a period of one year from the date of registration of the Certificate of Sale with the
appropriate Registry of Deeds within which to redeem the foreclosed property. Unlad
and/or PWU, therefore, have one year from October 24, 2002, or on or before October 24,
2003, within which to redeem the Mortgaged Property.

ISSUES:
1. n case of extra-judicial foreclosure of real property, what shall be the basis for the
computation of the 6% capital gains tax?
2. When should the capital gains tax be paid? (s it payable only upon the expiration of
the one-year redemption period (with the mortgagor not exercising the right of
redemption) or, specifically, within thirty (30) days from the expiration of the said one-
year redemption period?)
3. What is the basis for the documentary stamp tax in case of extra-judicial foreclosure of
real property?

RATIO:
1. The foreclosure sale under consideration shall be subject to 6% capital gains tax
based on the highest bid price.
NRC imposes 6% capital gains tax on the sale, exchange or disposition of land
and/or buildings treated as capital assets.
RMO No. 41-91 provides that while generally taxes on the sale, exchange or other
disposition of real property are based on the gross selling price, fair market value or zonal
value of the real property, whichever is higher, in the event of a sale of real property
effected through a public bidding, such as an extrajudicial foreclosure sale, the actual
consideration appearing in the Deed of Sale shall be an acceptable tax base in the
computation of taxes.
The tax base for computing the capital gains tax and documentary stamp tax on a
foreclosure sale is the highest bid price,

7
. No transfer of title to the highest bidder can be effected yet until and after lapse of the
one-year period from the issuance of the said certificate of sale. t should be noted
that there is no distinction whether the property is a capital asset or an ordinary asset.
Regardless of the nature of the property foreclosed, the mortgagor has one year within
which to redeem said property. Accordingly, the capital gains tax shall be due only
after the lapse of the one year redemption period. Therefore, considering that the
mortgagor has one year to redeem the property, the capital gains tax shall be due only
after the expiration of the one-year redemption period. The capital gains tax return
shall be filed and the tax payment should be made within thirty (30) days from the date
the one-year redemption period expires.

3. The documentary stamp tax shall be based on the bid price of the highest bidder but it
shall be paid only upon expiration of the one-year redemption period (with the
mortgagor not exercising the right of redemption) and, specifically, within five (5) days
after the close of the month in which the lapse of the said redemption period occurs

Addressed to: NationaI Tobacco Administration

FACTS:
E.O. No. 116 reorganized then the Ministry of Agriculture and Food, now
Department of Agriculture (DA), including its units and integrated all offices and agencies
like the tobacco agencies whose functions relate to agriculture; that Section 20 (a) thereof,
merged/consolidated the various tobacco agencies into what is now known as the National
Tobacco Administration; that as sole tobacco agency, you became an attached unit of the
DA under Section 19 (b) (3); and that subsequently, E.O. No. 245 was issued on July 24,
1987 implementing the consolidation and prescribing your charter.

ISSUES:
1. Whether or not you are subject to income tax or capital gains tax on the sale of your
properties no longer needed for your operation; and
2. Whether or not the sale is subject to documentary stamp tax.

RATIO:
1. Yes or no for the first issue
Under Section 24 (c) of the Tax Code, the provisions of existing special or general
laws to the contrary notwithstanding, all corporate taxpayers not specifically exempt under
Section 26 of the Code shall pay the rates provided in Section 24 of the same Code. ll
corporations, agencies, or instrumentalities owned or controlled by the government,
including the Government Service Insurance System and the Social Security System, shall
pay such rate of tax upon their taxable income as are imposed by Section 24 of the Tax
Code upon associations or corporations engaged in a similar business, industry, or activity.
Such being the case, you are subject to income tax on the gains to be derived from
the sale of your properties which are no longer needed for your operation.
You are liable to the 5% creditable withholding tax on your sale of your real property
beginning January 1, 1990, based on the gross selling price or total amount of
consideration or its equivalent paid to you, as seller thereof. For this purpose, the term
"Gross Selling Price" means the consideration stated in the sales document or the fair
market value/zonal value, whichever is higher. (RMC No. 7-90).
Moreover, either party to a taxable document may pay the documentary stamp tax
imposed under Section 196 of the Tax Code, as amended. However, whenever one party
to the taxable document enjoys exemption from the payment of documentary stamp tax
imposed under the said Section, the other party thereto who is not exempt shall be the one
directly liable for the tax. (Section 173, Tax Code, as amended).


FACTS:
There was a sale of 41 hectares of Canlubang property registered in the name of
the Spouses Ricardo and Maria Luisa Y. Teehankee in your favor was consummated at an
agreed purchase price of P80.00 per square meter or at a total cost of P32,800,000.00
payable in two installments; that the said vendors being also the owners of another 41
hectares of land adjacent to the said properties sold in your favor, have agreed to sell the
same; that you likewise bought the said adjacent property with in the two year period after
the execution of the Deed of Absolute Sale at the same purchase price of Eighty Pesos
(P80.00) per square meter; that the BR District Office, however, appraised the said
adjacent property at P450.00 per square meter; that such appraisal will greatly affect the
payment of capital gains tax due on the sale as a consequence of the tremendous increase
in the valuation of the property in question applying the zonal valuation; and that the
vendors have not and do not intend to contest the sale of land inspite of the increase in
market value taking into consideration the target beneficiaries/clients of the purchased land
are the less fortunate belonging to the lowest 30-50% of the income bracket as mandated
under Executive Order No. 90.

Considering that the sale made was intended for government housing project being
priced not on the basis of prevailing market values but more on the capacity to pay of target
clientele, you now request in behalf of the sellers, the Teehankees, that the required
fees/taxes to be charged be based on actual selling price of the lot and not on the zonal
valuation of the property.

ISSUES:
1. What should be the basis for the capital gains tax? Actual selling price of the lot or
zonal valuation of the property?

RATIO:
1. This is an exception to the general rule that whichever is higher is the basis for the
capital gains tax. n this case, the actual selling price, which is lower than the zonal
value of the property is the basis for the capital gains tax.

Under Section 21 (e) of the Tax Code, as amended, capital gains presumed to have
been realized from the sale, exchange or other disposition of real property located in the
Philippines classified as capital assets, including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and trusts, shall be taxed at the rate of
5% based on the gross selling price or the fair market value prevailing at the time of sale,
whichever is higher, provided, that the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its political subdivisions or
agencies or to government-owned or controlled corporations shall be determined either
under Section 21(a) or (e), of the same Code, at the option of the taxpayer.
Such being the case, your acquisition of the aforementioned properties of the
Spouses Teehankee rendered them liable to the 5% capital gains tax imposed under said
Section 21 (e) of the Tax Code, as amended, which tax liability shall be determined either
under Section 21(a) or (e) of the same Code, at their option. n case they elect the former,
this Office shall issue the certification authorizing the transfer of title to you as the
purchaser thereof.
8
On the other hand, in case they elect the latter, this Office hereby allows the
registration of the deed of sale with the Register of Deeds concerned and consequently, the
transfer of the property in your favor. Thereafter, upon submission of a new certificate of
title in your name at which time payment of the property required can be effected, the
Spouses Teehankee shall file the corresponding capital gains tax return within thirty (30)
days from said submission of the certificate of title. You as the government entity
concerned shall within the same period, withhold the capital gains tax due from the
Spouses Teehankee and remit the same to this Bureau.

This ruling applies only to sales of property in favor of the government wherein the
contract stipulates that the seller shall not be paid until title to the property is transferred to
the government.
The use of the actual consideration of !0.00 per square meter as basis in
determining the capital gains tax liability of the Spouses Teehankee as a consequence of
the aforesaid sale of their properties, is hereby granted as an exception to the policy of this
Bureau, in relation to Section 21(e) of the Tax Code.
Furthermore, the deed of sale executed for the purpose of said sale transactions
are subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as
amended, based on the consideration or value received or contracted to be paid for such
realty, which in this case is P80.00 per square meter.

REVENUE MEMORANDUM ORDER NO. 41-91
Subject : Determination of the Tax base of sales, exchange or any disposition or
conveyance of real property for documentary stamp tax purposes
To : All nternal Revenue Officers and Others Concerned

n all cases involving sale, exchange, or any disposition of real property, the tax base for
documentary stamp tax purposes shall be the same as the tax base used in the
computation of the capital gains tax which means, gross selling price, fair market value, or
zonal value of the real property, whichever is higher, except in the following instances,
where actual consideration appearing in the Deed of Sale shall be an acceptable tax base
in the computation of not only the capital gains tax but also of the documentary stamp tax,
viz:
1. Sale of residential lots financed by the National Home Mortgage Finance
Corporation (NHMFC) under its Community Mortgage Project, in favor of poor tenant-
beneficiaries. (Memorandum of the Commissioner to the RDO of Revenue District No. 25,
South Manila dated March 20, 1991; BR Ruling No. 001-91 )
2. Sale of land by the National Housing Authority (NHA) as mandated under E.O.
No. 90 , in favor of its target clientele/beneficiaries who belong to the lowest 30-50% of the
income bracket. (BR Ruling No. 232-90 )
3. Sale of real property affected through public bidding, e.g., judicial Sale;
extrajudicial foreclosure sale, where both the 5% capital gains tax and the documentary
stamp tax were computed based on the highest or winning bidprice. (BR Ruling Nos. 101-
89; 118-91 )
4. Negotiated purchases and/or sale of land by a government agency or
government-owned corporation. (BR Ruling Nos. 105-91; 001-91 )
5. When the State or any of its instrumentalities in the exercise of its power of
eminent domain, acquires through expropriation proceedings, private real property for
public use upon payment of "just compensation" to the owner. Both capital gains tax and
documentary stamp tax shall be computed based on said "just compensation" as actual
consideration


FACTS:
Hoechst Far East Marketing Corporation, is giving a monthly rice subsidy to all its
employees since 1980 and has been deducting withholding tax for said subsidy. Recently,
you learned that BR Ruling No. 348-87 was issued exempting the monthly rice subsidy
from withholding tax.

ISSUES:
1. Whether or not Hoechst can ask for a refund of the tax withheld from their employees
since 1980 and if so, can they deduct the amount from their future withholding tax
remittance.

RATIO:
1. The individual employees can claim a refund.
Hoechst's individual employees can claim a refund of the corresponding tax
withheld from their rice subsidies provided that a written claim therefor is filed in writing with
this Office within two years after the payment of the tax.
". . . No credit or refund of taxes or penalties shall be allowed unless the taxpayer
files in writing with the Commissioner a claim for credit or refund within two years after the
payment of the tax or penalty."
Moreover, it is only after the claim for refund or tax credit has been approved by this
Office and a tax credit memo issued that your company may apply the tax credit memo
against future withholding taxes of your employees to be remitted to this Office.

GuideIines in Determining Whether a ParticuIar ReaI Property is a CapitaI Asset or an
Ordinary Asset
REVENUE REGULATIONS NO. 7-2003
December 27, 2002

apital assets shall refer to all real properties held by a taxpayer, whether or not connected
with his trade or business, and which are not included among the real properties
considered as ordinary assets under Sec. 39(A)(1) of the Code.

Ordinary assets shall refer to all real properties specifically excluded from the definition of
capital assets under Sec. 39(A)(1) of the Code, namely:
1. Stock in trade of a taxpayer or other real 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
2. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under
Sec. 34(F) of the Code; or
4. Real property used in trade or business of the taxpayer.

Real properties acquired by banks through foreclosure sales are considered as their
ordinary assets. However, banks shall not be considered as habitually engaged in the real
estate business for purposes of determining the applicable rate of withholding tax.

a. Taxpayers engaged in the real estate business. Real property shall be classified
with respect to taxpayers engaged in the real estate business as follows:
1. #eal Estate Dealer. - All real properties acquired considered as ordinary assets.
9

2. #eal Estate Developer. All real properties acquired, whether developed or
undeveloped as of the time of acquisition, and all real properties which are held primarily
for sale or for lease to customers in the ordinary course of his trade or business OR which
would properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year AND all real properties used in the trade or business, shall be considered as
ordinary assets.

3. #eal Estate Lessor. All real properties of the lessor, whether land and/or
improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use
or being used in the trade or business shall likewise be considered as ordinary assets.

4. Taxpayers habitually engaged in the real estate business. - All real properties
acquired in the course of trade or business by a taxpayer habitually engaged in the sale of
real estate shall be considered as ordinary assets. Registration with the HLURB or HUDCC
as a real estate dealer or developer shall be sufficient for a taxpayer to be considered as
habitually engaged in the sale of real estate. f the taxpayer is not registered, he/it may
nevertheless be deemed to be engaged through the establishment of substantial relevant
evidence (such as consummation during the preceding year of at least six (6) taxable real
estate sale transactions, regardless of amount; registration as habitually engaged in real
estate business with the Local Government Unit or the Bureau of nternal Revenue, etc.,).

A property purchased for future use in the business, even though this purpose is later
thwarted by circumstances beyond the taxpayer's control, does not lose its character as an
ordinary asset. Nor does a mere discontinuance of the active use of the property change its
character previously established as a business property.
b. Taxpayer not engaged in the real estate business. - Real properties, whether land,
building, or other improvements, which are used or being used or have been previously
used in the trade or business of the taxpayer shall be considered as ordinary assets.

A depreciable asset does not lose its character as an ordinary asset, even if it becomes
fully depreciated, or there is failure to take depreciation during the period of ownership.
Monetary consideration or the presence or absence of profit in the operation of the property
is not significant in the characterization of the property. So long as the property is or has
been used for business purposes, whether for the benefit of the owner or any of its
members or stockholders, it shall still be considered as an ordinary asset.

Real property used by an exempt corporation in its exempt operations, shall not be
considered used for business purposes, and therefore, considered as capital asset.

Real property, whether single detached; townhouse; or condominium unit, not used in trade
or business as evidenced by a certification from the Barangay Chairman or from the head
of administration, in case of condominium unit, townhouse or apartment, and validated from
the existing available records of the BR, owned by an individual engaged in business, shall
be treated as capital asset.

c. Taxpayers changing business from real estate business to non-real estate
business. or one who amended its Articles of ncorporation from a real estate business
to a non-real estate business, the change of business or amendment of the primary
purpose of the business shall not result in the re-classification of real property held by it
from ordinary asset to capital asset.

d. Taxpayers originally registered to be engaged in the real estate business but
failed to subsequently operate. All real properties originally acquired by it shall continue
to be treated as ordinary assets.

e. Treatment of abandoned and idle real properties. - Real properties formerly forming
part of the stock in trade of a taxpayer engaged in the real estate business, or formerly
being used in the trade or business of a taxpayer engaged or not engaged in the real estate
business, which were later on abandoned and became idle, shall continue to be treated as
ordinary assets. Real property initially acquired by a taxpayer engaged in the real estate
business shall not result in its conversion into a capital asset even if the same is
subsequently abandoned or becomes idle.
Provided however, that properties classified as ordinary assets for being used in business
by a taxpayer engaged in business other than real estate business are automatically
converted into capital assets upon showing of proof that the same have not been used in
business for more than two (2) years prior to the consummation of the taxable transactions
involving said properties.

f. Treatment of real properties that have been transferred to a buyer/transferee,
whether the transfer is through sale, barter or exchange, inheritance, donation or
declaration of property dividends.
Real properties classified as capital or ordinary asset in the hands of the seller/transferor
may change their character in the hands of the buyer/transferee. The classification of such
in the hands of the buyer/transferee shall be according to the following rules:
1. Real property transferred through succession or donation to the heir or donee
who is not engaged in the real estate business with respect to the real property
inherited or donated, and who does not subsequently use such property in trade
or business, shall be considered as a capital asset in the hands of the heir or
donee.
2. Real property received as dividend by the stockholders who are not engaged in
the real estate business and who do not subsequently use such real property in
trade or business shall be treated as capital assets in the hands of the recipients
even if the corporation which declared the real property dividend is engaged in
real estate business.
3. The real property received in an exchange shall be treated as ordinary asset in
the hands of the transferee in the case of a taxfree exchange by taxpayer not
engaged in real estate business to a taxpayer who is engaged in real estate
business, or to a taxpayer who, even if not engaged in real estate business, will
use in business the property received in the exchange.
4.
g. Treatment of real property subject of involuntary transfer. - n the case of
involuntary transfers of real properties, including expropriation or foreclosure sale, the
involuntariness of such sale shall have no effect on the classification of such real property
in the hands of the involuntary seller, either as capital asset or ordinary asset, as the case
may be.

For example, real properties forming part of the inventory of a real estate dealer, which are
foreclosed, shall, for purposes of determining the applicable tax on such foreclosure sale,
be treated as ordinary assets. On the other hand, the nature of such real property in the
hands of the foreclosure buyer shall be determined in accordance with the rules stated in
sub-paragraph (f).

TUASON VS LINGAD
G.R. No. 24248
10
JuIy 31 1974

QUICK SUMMARY: n 1948 the petitioner inherited from his mother several tracts of land,
among which were two parcels subdivided into twenty-nine lots. Twenty-eight were
allocated to the then occupants who had lease contracts with the petitioner's predecessor.
The 28 lots were sold, but the 29th lot was further subdivided into small lots The small lots
were then sold over the years on a uniform 10-year annual amortization basis. The Court
held that 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. Circumstances show that he was
engaged in the real estate business.

FACTS:
n 1948 the petitioner inherited from his mother several tracts of land, among which
were two contiguous parcels situated on Pureza and Sta. Mesa streets in Manila, with an
area of 318 and 67,684 square meters, respectively.
When the petitioner's mother was yet alive she had these two parcels subdivided
into twenty-nine lots. Twenty-eight were allocated to their then occupants who had lease
contracts with the petitioner's predecessor at various times from 1900 to 1903, which
contracts expired on December 31, 1953. The 29th lot (hereinafter referred to as Lot 29),
with an area of 48,000 square meters, more or less, was not leased to any person. t
needed filling because of its very low elevation, and was planted to kangkong and other
crops.
After the petitioner took possession of the mentioned parcels in 1950, he instructed
his attorney-in-fact, J. Antonio Araneta, to sell them.
There was no difficulty encountered in selling the 28 small lots as their respective
occupants bought them on a 10-year installment basis. Lot 29 could not however be sold
immediately due to its low elevation.
Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided
into small lots and paved with macadam roads. The small lots were then sold over the
years on a uniform 10-year annual amortization basis. J. Antonio Araneta, the petitioner's
attorney-in-fact, did not employ any broker nor did he put up advertisements in the matter
of the sale thereof.
n 1953 and 1954 the petitioner reported his income from the sale of the small lots
(P102,050.79 and P103,468.56, respectively) as long-term capital gains. On May 17, 1957
the Collector of nternal Revenue upheld the petitioner's treatment of his gains from the
said sale of small lots, against a contrary ruling of a revenue examiner.
On the basis of the 1957 opinion of the Collector of nternal Revenue, the revenue
examiner approved the petitioner's treatment of his income from the sale of the lots in
question. which was concurred in by the Commissioner of nternal Revenue.
On January 9, 1963, however, the Commissioner reversed himself and considered
the petitioner's profits from the sales of the mentioned lots as ordinary gains. On January
28, 1963 the petitioner received a letter from the Bureau of nternal Revenue advising him
to pay deficiency income tax for 1957

ISSUES:
1. WON 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
2. WON he was engaged in the business of leasing the lots he inherited from his
mother as well other real properties

RATIO:
YES FOR BOTH. As thus defined by law, the term "capital assets" includes all the
properties of a taxpayer whether or not 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.

f 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 more than twelve
months, 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 not merely the duty to respect the terms of any contract thereon, but as well the
correlative 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. 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. Circumstances show that
he was engaged in the real estate business.
This Court notes, however, that in ordering the petitioner to pay the deficiency
income tax, the Tax Court also required him to pay a 5% surcharge plus 1% monthly
interest. n our opinion this additional requirement should be eliminated because the
petitioner relied in good faith upon opinions rendered by no less than the highest officials of
the Bureau of nternal Revenue, including the Commissioner himself.

ACCORDNGLY, the judgment of the Court of Tax Appeals is affirmed, except the portion
thereof that imposes 5% surcharge and 1% monthly interest, which is hereby set aside. No
costs.

ANTONIO PORTA FERRER VS. (COLLECTOR) NOW COMMISSIONER OF INTERNAL
REVENUE
G.R. No. L-16021
August 31,1962

QUICK SUMMARY: Petitioner Antonio Porta Ferrer sold his bakery "La Suiza Bakery to
Juan Pons for the summer of P100,000. After deducting the total book value of the assets
and the incidental expenses from the gross selling price, petitioner filed his income tax
return, showing a net profit of P19,678.09 as having been realized from the sale of the
bakery and paid P2,439.00 as income tax. Petitioner later requested a refund, claiming
that the bakery was a capital asset which he had held for more than twelve months. The
Court denied the claim because the sale of the bakery constitute sale of individual assets,
some of which were capital assets while others were ordinary assets and petitioner failed to
show what portion of the selling price was fairly attributable to each asset, therefore the
Court held that it could not ascertain the capital and/or ordinary gains taxes properly
payable.
11
FACTS:
Petitioner Antonio Porta Ferrer sold his bakery "La Suiza Bakery to Juan Pons for
the summer of P100,000.00. Petitioner was the sole proprietor of the said bakery from
October 16, 1951 up to September 15, 1955. The assets of the bakery consisted of
accounts receivable raw materials, wrapping supplies, firewood, unexpired insurance,
good-will, machinery and equipment, and furniture and fixtures, with a total book value of
P74,321.91. n selling the bakery, petitioner spent a total of P6,000.00.
After deducting the total book value of the assets and the incidental expenses from
the gross selling price, petitioner filed 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.
Petitioner later requested the respondent, Commissioner of nternal Revenue, to
refund the sum of P2,030.00, claiming that the bakery was a capital asset which he had
held for more than twelve months, so that only 50 per cent of it was taxable under the
National nternal Revenue Code considering that the profit from its sale was a long term
capital gain. When no action was taken by respondent on his request, petitioner filed a
petition for refund in the Court of Tax Appeals. The said Court denied petitioner's claim for
refund on the ground that the sale of the bakery constitute sale of individual assets, some
of which were capital assets while the 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.
Hence, this petition.

ISSUES:
1. WON the 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.
2. Whether or not the sale of the bakery was a sale of capital asset or of individual
assets comprising the business

RATIO:
1. NO.
The petitioner claims that the business had liabilities amounting to P19,183.01
which, if deducted along with the book value of the assets and the incidental expenses from
the selling price of P100,000.00, would show a profit of P495.05 only. The matter of
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.
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 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 unfair to
the adverse party.

2. The Supreme Court ruled that the sale of the "La Suiza Bakery was a sale of individual
assets comprising the business.
Parenthetically, it may be noted that tax rates are graduated upwards as the total
amount of income increases. But capital assets are 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 though the increment
might have developed over several years or was the result of years of 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 each year the
asset was held. n an attempt to compensate for this, only a percentage of the gain on such
sales is required to can be deducted in the year in which realized.
We find that Section 34 (a) (1) of our Tax Code is patterned after Section 117 (a)
(1) of the U.S. nternal Revenue Code. n interpreting this latter provision, the United States
Circuit Court of Appeals held in the leading case of illiams v. McGowan, where it was
held that "Congress plainly did mean to comminute the elements of a business; plainly it did
not regard the whole as "capital assets."
n line with this ruling, We hold that the sale of the "La Suiza Bakery" was a sale not
of a single asset but of individual assets that made up the business. And since petitioner
failed to point out what part of the price he had received could be fairly attributed to each
asset, the Tax Court correctly denied his claim.
n order to ascertain the capital and/or ordinary gains taxes properly payable on the
sale of a business, including its tangible assets, it is incumbent upon the taxpayer to show
not only the cost basis of each asset, but also what portion of the selling price is fairly
attributable to each asset.
OTHER DOCTRINES:
Section 34 of the Tax Code provides in part:
apital gains and losses. (a) Definitions. As used in this Title
(1) CapitaI 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, of property used in the trade or business, of a character which is subject
to allowance for depreciation provided in subsection (f) of section thirty; or real
property used in the trade or business of the taxpayer.
x x x x x x x x x
(b) !ercentage taken into account. n the case of a taxpayer, other than a
corporation, only the following percentage of the gain or loss recognized upon the
sale shall be 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) Fifty per centum if the capital asset has been held for more than twelve
months.

WHEREFORE, the decision of the Court of Tax Appeals is hereby affirmed, with costs
against the petitioner.

TOMAS CALASANZ, ET AI., v CIR and CTA
G. R. No. L-26284
October 8, 1986

QUICK SUMMARY: Ursula Calasanz (wife of Tomas) inherited from her father a parcel of
land in Cainta, Rizal. To liquidate her inheritance, she had the land surveyed, and
subdivided into lots, to make it more saleable. On Audit, the spouses were adjudged as
engaged in real estate business and were assessed real estate dealer's tax and deficiency
income tax on ordinary gain. A sale of inherited real property usually gives capital gain/loss
even though the property has to be subdivided or improved to make it saleable. But if the
inherited property is substantially improved or very actively sold or both it may be treated as
held primarily for sale to customers in the ordinary course of the heir's business.

FACTS:
12
Ursula Calasanz (wife of Tomas) inherited from her father a parcel of land in Cainta,
Rizal. n order to liquidate her inheritance, she had the land surveyed, and subdivided into
lots, and put up improvements such as roads, drainage, lighting, etc., to make it more
saleable. Afterwards, the lots were sold. She and her husband in the same year filed a join
income tax return with the BR, disclosing a profit of P 31, 060. 06 from the sale of the lots,
and reported 50% or P15,530.03 as taxable capital gains. However upon audit and review,
they were adjudged as petitioners engaged in real estate business and were thus assessed
real estate dealer's tax and deficiency income tax on ordinary gain.
The spouses Calasanz contended that inherited land is a capital asset within the
meaning of Section 34 of the Tax Code and that an heir who liquidates his inheritance
cannot be said to have engaged in real estate business and may not be denied the
preferential tax treatment given to gains from sale of capital assets, merely because he
disposed of it in the only possible and advantageous way. They also averred that the land
was sold because of their intention to effect a liquidation, it's being divided into smaller lots
made it easier to dispose of. However they also admitted that the improvements they
introduced to the land were added to facilitate its sale.
On the other hand, respondent Commissioner maintained that the imposition of the
taxes in question is in accordance with law since petitioners are deemed to be in the real
estate business for having been involved in a series of real estate transactions pursued for
profit. Respondent argued that property acquired by inheritance may be converted from an
investment property to a business property if, as in the present case, it was subdivided,
improved, and subsequently sold and the number, continuity and frequency of the sales
were such as to constitute "doing business." Respondent likewise contended that inherited
property is by itself neutral and the fact that the ultimate purpose is to liquidate is of no
moment for the important inquiry is what the taxpayer did with the property. Respondent
concluded that since the lots are ordinary assets, the profits realized therefrom are ordinary
gains, hence taxable in full.

ISSUES:
1. Whether the gains realized from the sale are taxable in full as ordinary income or
capital gains taxable at capital gain rates
2. Whether or not petitioners are real estate dealers liable for real estate dealer's
fixed tax

RATIO:
1. ORDNARY NCOME.
The assets of a taxpayer are classified for income tax purposes into ordinary
assets and capital assets. Section 34[a] [1] of the National nternal Revenue Code broadly
defines 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.

f an asset is not among the exceptions, it is a capital asset; conversely, assets
falling within the exceptions are ordinary assets. And necessarily, any gain resulting from
the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind
of asset involved in the transaction.
However there is no fixed formula or rule which can determine whether a property
sold by a taxpayer was sold in the ordinary course of business or whether it was sold as a
capital asset. The facts and circumstances of each case must be analyzed to determine
that. A property initially classified as a capital asset may be treated as an ordinary asset if a
combination of the factors show that the activity was in furtherance of or in the course of
the taxpayer's trade or business.
Thus, a sale of inherited real property usually gives capital gain or loss even though
the property has to be subdivided or improved or both to make it saleable. However, if the
inherited property is substantially improved or very actively sold or both it may be treated as
held primarily for sale to customers in the ordinary course of the heir's business.
Upon an examination of the facts on record, the activities of petitioners are
indistinguishable from those invariably employed by one engaged in the business of selling
real estate. This is primarily due to the development of the real property. The petitioners did
not sell the land in the condition they acquired it. t was originally agricultural land, which
they turned into a residential area, introducing numerous improvements in order to entice
buyers. The cost of the improvements amounted to a large amount, and the extensive
improvements indicate that the seller held the property primarily for sale to customers in the
ordinary course of business.

2. YES, They are Real Estate Dealers.
The existence of contract receivables, and the sizable amount of the receivables in
comparison of the sales volume during the same period shows that lots were sold on
instalment basis, and suggests the number, continuity, and frequency of the sales. Another
indicator of participating in real estate business is the circumstance that the lots were
advertised
13
for sale to the public and that sales and collection commissions were paid out
during the period in question.
Petitioners, likewise, urge that the lots were sold solely for the purpose of
liquidation. The fact that property is sold for purposes of liquidation does not foreclose a
determination that a "trade or business" is being conducted by the seller. The real property
can be sold without losing the benefits of the capital gain provision, unless he enters the
real estate business and carries on the sale in the manner in which such a business is
ordinarily conducted. n that event, the liquidation constitutes a business and a sale in the
ordinary course of such a business and the preferred tax status is lost.

n view of the foregoing, We hold that in the course of selling the subdivided lots, petitioners
engaged in the real estate business and accordingly, the gains from the sale of the lots are
ordinary income taxable in full.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs.
SO ORDERED.

CHINA BANKING CORP. v. CA
G.R. No. 125508.
JuIy 19, 2000

QUICK SUMMARY: in 1986, it was shown that First CBC Capital (Asia), Ltd., has become
insolvent. With the approval of angko Sentral, petitioner wrote-off as being worthless its
investment in First CBC Capital (Asia), Ltd., in its 1987 TR and treated it as a bad debt or
as an ordinary loss deductible from its gross income. The CR disallowed the deduction and
assessed petitioner for income tax deficiency. Assuming that the securities had become
worthless, they should then be classified as "capital loss," and not as a bad debt expense
there being no indebtedness to speak of between petitioner and its subsidiary.

FACTS:
Sometime in 1980, petitioner China Banking Corporation made a 53% equity
investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in
13
financing and investment with "deposit-taking" function. The investment amounted to
P16,227,851.80, consisting of 106,000 shares with a par Value of P100 per share.
n the course of the regular examination of the financial books and investment
portfolios of petitioner conducted by angko Sentral in 1986, it was shown that First CBC
Capital (Asia), Ltd., has become insolvent. With the approval of angko Sentral, petitioner
wrote-off as being worthless its investment in First CBC Capital (Asia), Ltd., in its 1987
ncome Tax Return and treated it as a bad debt or as an ordinary loss deductible from its
gross income.
Respondent Commissioner of internal Revenue disallowed the deduction and
assessed petitioner for income tax deficiency in the amount of P8,533,328.04, inclusive of
surcharge, interest and compromise penalty. The disallowance of the deduction was made
on the ground that the investment should not be classified as being "worthless" and that,
although the Hongkong Banking Commissioner had revoked the license of First CBC
Capital as a "deposit-taping" company, the latter could still exercise, however, its financing
and investment activities. Assuming that the securities had indeed become worthless,
respondent Commissioner of nternal Revenue held the view that they should then be
classified as "capital loss," and not as a bad debt expense there being no indebtedness to
speak of between petitioner and its subsidiary.

ISSUE:
Should the investment made by China Bank be considered worthless and be declared as
bad debt? NO

RATIO:
The claim of petitioner that the shares of stock in question have become worthless
is based on a Profit and Loss Account for the Year-End 31 December 1987, and the
recommendation of angko Sentral that the equity investment be written-off due to the
insolvency of the subsidiary. While the matter may not be indubitable (considering that
certain classes of intangibles, like franchises and goodwill, are not always given
corresponding values in financial statements, there may really be no need, however, to go
of length into this issue since, even to assume the worthlessness of the shares, the
deductibility thereof would still be nil in this particular case. At all events, the Court is not
prepared to hold that both the tax court and the appellate court are utterly devoid of
substantial basis for their own factual findings.
Subject to certain exceptions, such as the compensation income of individuals and
passive income subject to final tax, as well as income of non-resident aliens and foreign
corporations not engaged in trade or business in the Philippines, the tax on income is
imposed on the net income allowing certain specified deductions from gross income to be
claimed by the taxpayer. Among the deductible items allowed by the National nternal
Revenue Code ("NRC") are bad debts and Iosses.
An equity investment is a capitaI, not ordinary, asset of the investor the sale or
exchange of which results in either a capital gain or a capital loss. The gain or the loss is
ordinary when the property sold or exchanged is not a capital asset. A capital asset is
defined negatively in Section 33(1) of the NRC.
(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 twenty-nine; or real property used in the
trade or business of the taxpayer.
Thus, shares of stock; like the other securities defined in Section 20(t) of the NRC,
would be ordinary assets only to a deaIer in securities or a person engaged in the
purchase and saIe of, or an active trader (for his own account) in, securities.
The above provision conveys that the loss sustained by the holder of the securities,
which are capital assets (to him), is to be treated as a capitaI Ioss as if incurred from a
saIe or exchange transaction. A capital gain or a capital loss normally requires the
concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the
thing sold or exchanged is a capital asset. When securities become worthless, there is
strictly no sale or exchange but the law deems the loss anyway to be "a loss from the sale
or exchange of capital assets. similar kind of treatment is given, by the NRC on the
retirement of certificates of indebtedness with interest coupons or in registered form, short
sales and options to buy or sell property where no sale or exchange strictly exists. n these
cases, the NRC dispenses, in effect, with the standard requirement of a sale or exchange
for the application of the capital gain and loss provisions of the code.
CapitaI Iosses are aIIowed to be deducted onIy to the extent of capitaI gains,
i.e., gains derived from the saIe or exchange of capitaI assets, and not from any
other income of the taxpayer.
n the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a
subsidiary corporation of petitioner bank whose shares in said investee corporation are not
intended for purchase or sale but as an investment. Unquestionably then, any loss
therefrom would be a capital loss, not an ordinary loss, to the investor.

n sum -
a) The equity investment in shares of stock held by CBC of approximately 53% in its
Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness,
and it is a capitaI, not an ordinary, asset.
b) Assuming that the equity investment of CBC has indeed become "worthless," the
loss sustained is a capitaI, not an ordinary, Ioss.
c) The capital loss sustained by CBC can only be deducted from capital gains if any
derived by it during the same taxable year that the securities have become
"worthless."

WHEREFORE, the Petition is DENED. The decision of the Court of Appeals disallowing
the claimed deduction of P16,227,851.80 is AFFRMED.
SO ORDERED.

May 22, 1996

FACTS:
A Deed of Absolute Sale was executed on January 30, 1996 by and between the
seller's Mr. Jose C. Laus, et. al. and the New MBS Marketing Corporation over a parcel of
land together with the improvements thereon (5-door apartments) classified as Commercial
per Tax Declaration issued by the Caloocan City Assessor and situated in the Morning
Breeze Subdivision, District of Balintawak, Caloocan City, containing an area of 284.50
square meters, for and in consideration of P1,800,000.00
The sellers are individuals persons who are not habitually engaged in the real
estate business who were assessed a credible withholding tax 7.5%. They protested the
said assessment of 7.5% but are willing and ready to pay the 5% capital gains tax.

ISSUE:
The seller's are requesting for a ruling on the correct tax rate.

14
RATIO: 7.5%
Pursuant to Section 21 (e) of the Tax code, capital gains presumed to have been
realized from the sale, exchange or other disposition of real property located in the
Philippines classified as capital assets, including pacto de retro sales and other forms of
conditional sales, shall be taxed at the rate of 5% based on the gross selling price or the
fair market value at the time of sale, whichever is higher.

On the other hand, 1 of Revenue Regulations No. 12-94 known as the "Expanded
Withholding Tax Regulations" reads
"Section 1. Income !ayments Subject to reditable ithholding Tax Rates
!rescribed Thereon. Except as herein otherwise provided, there shall be withheld
a creditable income tax at the rates herein specified for each class of payee from the
following items of income payments to persons residing in the Philippines.
(j) Gross selling price or total amount of consideration or its equivalents paid to the
seller/owner for the sale, exchange or transfer of
xxx xxx xxx
4. Real property, other than capital asset, by an individual, estate, trust, fund or
pension fund or real property, whether held as capital or ordinary asset, by a
corporation not habitually engaged in the real estate business seven and one-half
percent (7.5%)

Such being the case, the aforementioned real property with a 5-door apartment
constructed thereon classified as Commercial by the Caloocan City Assessor's Office does
not fall within the contemplation of the foregoing definition of the term "capital assets".
Accordingly, the sale of the property which is an ordinary asset is subject to the credible
expanded withholding tax of 7.5% prescribed.

October 6, 2004

FACTS:
Winner Real Estate Development Corporation, though incorporated in 1989 as a
real estate corporation, has not engaged in the real estate business since its inception; that
as a result of which, the Board of Directors decided to sell and dispose of its real property
which could probably lead to the dissolution of the corporation.

ISSUES:
1. Will the sale of the real property owned by Winner Real Estate Development
Corporation ("Winner") be considered as sale of capital asset or ordinary asset?
2. n either case, what is the rate/percentage of capital gains tax or other taxes to
be paid?
3. Will the sale of the property to the government for low cost housing development
entitle the Corporation to a special tax rate?

RATIO:
1. ORDNARY ASSET
Section 3(a)(4)(d) of RR 7-2003 provides:
"d. Taxpayers originally registered to be engaged in the real estate business but failed
to subsequently operate. n the case of subsequent non-operation by taxpayers
originally registered to be engaged in the real estate business, all real properties
originally acquired by it shall continue to be treated as ordinary assets."
Accordingly, the fact that Winner has not engaged in the real estate business since its
incorporation in 1989 notwithstanding, all real properties originally acquired by Winner shall
continue to be treated as ordinary assets.

2. CREDTABLE WTHOLDNG TAX and ORDNARY NCOME TAX
The facts being considered, the sale of land and/or building classified as ordinary
asset and other real property (other than land and/or building treated as capital asset),
regardless of the classification thereof, all of which are located in the Philippines, shall be
subject to the creditable withholding tax (expanded) under RR No. 2-98, as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the Tax Code of 1997. n lieu
of the ordinary income tax, however, domestic corporations may become subject to the
minimum corporate income tax (MCT) under Sec. 27(E) of the same Code.

3. EXEMPT from project-related income taxes.
Pursuant to Section 20 of R.A. No. 7279, pertinent portion of which reads:
"Sec. 20. Incentives for the !rivate Sector !articipating in Socialized Housing. To
encourage greater private sector participation in socialized housing and further
reduce the cost of housing units for the benefit of the underprivileged and homeless,
the following incentives shall be extended to the private sector:
(d) Exemption from the payment of the following:
(1) Project-related income taxes;
(2) Capital gains tax on raw lands used for the project;

Such being the case, sale of the corporation's property to the government for
socialized housing is exempt from the payment of the creditable withholding tax. However,
it is observed that documentary stamp tax is not one of the taxes covered by the tax
exemption clause.
Accordingly, Winner being the landowner, is liable to pay the documentary stamp
tax on the document conveying the property to the Socialized Housing Program based on
the actual consideration paid by the government, as vendee, to Winner, as the landowner.

JuIy 19, 2004

FACTS:
Gospel Support Corp. (GSC) is a close corporation duly registered and whose only
business is buying and selling shares of stock at the NYSE and the Nasdaq. According to
its Articles of ncorporation, its primary purpose is to invest in stocks without acting as a
stockbroker or a dealer in securities.

GSC buys through an American stockbroker who charges a commission per trade; that
GSC trades only for itself and is not a stockbroker, but buys through a stockbroker in the
United States; that GSC is not a "dealer in securities" under the Philippine Tax Code; that
GSC trades through the internet and sometimes by telephone e.g. GSC tells its broker to
buy Stock XYZ at such and such a price or sell stock YMB at such and such a price; that
for each transaction, the stockbroker charges GSC a "commission" which becomes part of
the net buy or net sale.

ISSUE:
Whether Gospel Support Corporation (GSC) is subject to capital gains tax under Section
27(D)(2) or other percentage tax under Section 127(A) of the Tax Code of 1997.
- Subject to 32% Corporate Income Tax.

15
FACTS:
Under Section 27(A) of the Tax Code of 1997, domestic corporations are subject to tax on
their income derived from sources within and without the Philippines at the rate of 32%.
Thus, GSC, as a domestic corporation, is subject to tax on its income from sources within
and without the Philippines at the rate of 32%. Accordingly, income by GSC, which is solely
derived from buying and selling of shares of stock at the New York Stock exchange and the
Nasdaq, is considered as income by GSC from sources without the Philippines, taxable at
the rate of 32%.

Neither the percentage tax of 1/2 of 1% under Section 127(A) of the Tax Code of 1997 nor
the capital gains tax of 5% or 10% under Section 27 (D) (2) of the same Code apply.

Section 127 (A) of the Tax Code of 1997 imposes a tax at the rate of 1/2 of 1% of the gross
selling price or gross value in money on the sale, barter or exchange of shares of stock
listed and traded through the local stock exchange. This does not apply to GSC, since its
shares of stock are not listed or traded through the local stock exchange.

"The term ordinary income includes any gain from the sale or exchange of property which is
not a capital asset or property described in Section 39(A)(1). Any gain from the sale or
exchange of property treated as ordinary income shall be treated as gain from the sale or
exchange of property which is not a capital asset. The term ordinary loss includes any loss
from the sale or exchange of property which is not a capital asset.

"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..

GSC's primary purpose is to invest in stocks without acting as a stockbroker or a dealer in
securities. Such being the case, shares of stock held by GSC in pursuance of its primary
purpose are more appropriately classified as property held primarily for sale to customers in
the ordinary course of its trade or business and which would properly be included in its
inventory if on hand at the close of the taxable year, or property which is more commonly
referred to as "ordinary asset", as opposed to "capital assets."

Finally, ArticIe 23 of the RP-US Tax Treaty provides, viz.:
"xxx xxx xxx
"2. n accordance with the provisions and subject to the limitations of the law of the
Philippines (as it may be amended from time to time without changing the general
principle hereof), the Philippines shall allow to a citizen or resident of the
Philippines as a credit against the Philippine tax the appropriate amount of
taxes paid or accrued to the United States and, in the case of a Philippine
corporation owning more than 50 percent of the voting stock of a United States
corporation from which it receives dividends in any taxable year, shall allow credit for
the appropriate amount of taxes paid or accrued to the United States by the United
States corporation paying such dividends with respect to the profits out of which such
dividends are paid.

Such appropriate amount shall be based upon the amount of tax paid or accrued to
the United States, but the credit shall not exceed the limitations (for the purpose of
limiting the credit to the Philippine tax on income from sources within the United
States, and on income from sources outside the Philippines) provided by Philippine
law for the taxable year. For the purpose of applying the Philippine credit in relation to
taxes paid or accrued to the United States, the rules set forth in Article 4 (Source of
ncome) shall be applied to determine the source of income. For purposes of applying
the Philippine credit in relation to taxes paid or accrued to the United States, the
taxes referred to in paragraphs 1(a) and 2 of (Taxes Covered) shall be considered to
be income taxes." (Emphasis supplied)

Subject to the conditions laid down in the foregoing provisions, GSC, a Philippine
corporation earning income from the United States, may apply the taxes paid or accrued to
the United States as a credit against its Philippine income tax liability of 32%.

March 1, 1983

FACTS:
Resins, nc. is registered with the Board of nvestments under R.A. 5186 and R.A. 6135 for
the manufacture of different products. t leased from Resins, nc. Retirement Plan with
option to buy certain tanks and tankers. The option to buy was later assigned by Resins,
nc. to Chem nsurance Brokers Service Corporation. From the assignment of the option,
Resins, nc. realized a gain or profit.

ISSUE:
Whether or not a gain derived from sales or assignment of an option to buy machineries is
an ordinary or capitaI gain.

RATIO:
n reply, please be informed that an option is property which, in the hands of a taxpayer
who does not deal in options like Resins, nc., may be considered a capital asset.
Accordingly, the gain realized by Resins, nc. from the assignment to Chem nsurance
Brokers Service Corporation of an option to buy certain tanks and tankers is a capital gain.
(BR Ruling No. 71-023 dated October 15, 1971)

BIR RuIing No 98-97
Read Rite has existing long term Lease Contracts with Option to Purchase over two
contiguous parcels of land with improvements with Philamlifeand with PERF Realty
Corporation.
Philamlife and PERF have a prospective buyer who is willing to buy the Leased Properties
free for all liens and encumbrances including Read Rite's existing leasehold rights and
option to purchase.
Philamlife and PERF are prepared to enter into an agreement with Read Rite wherein Read
Rite will consent and agree to the pre-termination of the Lease Contracts and cancel the
options to purchase stipulated therein for a certain consideration. The amount of the
consideration to be mutually agreed upon by Read Rite and Philamlife and PERF
represents the pre-termination penalty, price for the cancellation of the options to purchase
and indemnity for the resulting disturbance or damage arising from the lease pre-
termination.
Issues Presented:
16
1. Whether the consideration to be received by Read Rite from Philamlife and
PERF representing pre-termination penalty and price for the cancellation of the
option to purchase is not subject to the creditable expanded withholding tax.
2. Whether said consideration is not subject to the 10% VAT since there is no sale,
barter or exchange of goods or and properties in the ordinary course of trade or
business.
3. Whether the receipt of said consideration shall result in a capital gain on the part
of Read Rite which gain is subject to the 35% corporate income tax.
4. n determining the gain from the sale of the Leased Properties, the consideration
to be paid by Philamlife and PERF to Read Rite shall be deductible from the
selling price as part of the adjusted cost basis, even though the amount of such
consideration is higher than the original cost basis
RuIing:
1. Pursuant to Revenue Regulations No. 6-85, as amended, otherwise known as
the Revised and Expanded Withholding Tax Regulations implementing Section
50(b) of the Tax Code, only payments to persons enumerated therein are subject
to the expanded withholding tax. (BR Ruling Nos. 101-94 dated May 3, 1994 and
12-83 dated February 3, 1983;) Accordingly, your opinion is hereby confirmed
that since the payment to be received by the lessee, Read Rite, from the lessors,
Philamlife and PERF, as consideration for the pre-termination of the lease
contracts, cancellation of options to purchase and indemnity for the disturbance
and damages arising from such pre-termination and cancellation is not among
those specified in Revenue Regulations No. 6-85, as amended, such payment is
not subject to the expanded withholding tax.

2. n BR Ruling No. 31-83 dated March 1, 198, this Office has ruled that an option
to buy, in the hands of a taxpayer who does not deal in options, is a capital asset
and the sale thereof gives rise to a capital gain.

Since Read Rite does not deal in leasehold rights and options in its ordinary
course of trade or business, the pre-termination of the leases and cancellation of
the options to purchase will not be made in the ordinary course of trade or
business of Read Rite. Hence, your opinion that the pre-termination of the lease
and the cancellation of the options to purchase is not subject to VAT is hereby
confirmed.

3. The consideration to be received by Read Rite shall form part of its gross income
subject to the 35% corporate income tax since under Section 28 of the Tax Code,
s amended, the term "gross income" is defined to mean all income from whatever
source derived. ncome, in a broad sense, means all wealth which flows into the
taxpayer other than as a mere return of capital.

4. On the part of Philamlife and PERF , the consideration paid to Read Rite shall
form part of the adjusted cost basis of the Leased Properties which shall be
deductible from the selling price in determining the respective gains derived by
Philamlife and PERF from the sale of the Leased Properties.

The basis of property acquired by purchase is its cost to the taxpayer which
includes the purchase price plus incidental expenses, if any. (BR Ruling No. 19-
95 dated February 13, 1995)

Accordingly, your opinion is hereby confirmed that since the consideration for the
pre-termination of the lease contracts and cancellation of the options to purchase
are necessary expenses to prepare the leased properties for sale and free the
same of the leasehold rights and options to purchase, said consideration should
form part of the adjusted cost basis of the properties in the hands of Philamlife
and PERF regardless of the amount of such consideration relative to the original
cost basis.

ROXAS v CTA
Antonio, Eduardo and Jose formed a partnership, Roxas y Compania, to manage the
19,000 hectares agricultural lands in Nasugbu, Batangas, a residential lot in Malate, Manila
and shares of stocks in different corporations acquired from their ancestors.

After the WW, the Government persuaded the Roxas brothers and agreed to sell 13,500
hectares of their property in Batangas to be distributed by the government to the actual
occupants as part of the government's land reform program, for P2,079,048.47 plus
P300,000.00 for survey and subdivision expenses.

However, the government did not have enough funds to pay them. So they make
arrangement for the Rehabilitation Finance Corp. to advance 1.5M as loan with the land as
collateral. Roxas y Cia. will then pay its loan from the proceeds of the yearly amortizations
paid by the farmers.

Antonio and Eduardo got married, leaving Jose to stay in the house for which he paid
rentals to Roxas y Cia. the amount of P8000/yr.

The CR assessed the company deficiencies in real estate dealer's tax on the house rentals
from Jose, securities dealer's tax from profits from the purchase and sale of securities and
the unreported net profits from the sale of the Batangas Land. t also disallowed
deductions claimed by the brothers. Roxas protested the assessment.

Issues:
1. W/N Roxas y Cia. is liable for payment of fixed real estate dealer's tax? YES
2. W/N the profit derived from the sale of Batangas land considered an ordinary
gain 100% taxable?NO
3. W/N the expenses claimed can be included as deductions?

HeId:
The Roxas y Cia. is liable to pay fixed tax as real estate dealer from the rentals of Jose but
the Batangas land is considered a capital asset 50% taxable only. The contributions to the
Manila Police trust fund was allowed as deductions. The Christmas funds to Pasay Police,
Pasay Fireman, Baguio Police were not allowed as deductions. As well as the
contributions to civic org., Our lady of Fatima Chapel.

Ratio:
1. Section 194 of the Tax Code, in considering as real estate dealers owners of real
estate receiving rentals of at least P3,000.00 a year, does not provide any qualification
as to the persons paying the rentals.
.. "Real estate dealer" includes any person engaged in the business
of buying, selling, exchanging, leasing or renting property on his own
17
account as principal and holding himself out as a full or part-time
dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three thousand
pesos or more a year: . ...
2. The sale of the Batangas land is only an isolated transaction and it was done at the
request of the government for lack of funds to pay the said property. The Municipality
of Nasugbu even passed a resolution expressing gratitude to the Roxas y Cia. n
fine, #oxas y ia. cannot be considered a real estate dealer for the sale in
question. Hence, pursuant to Section 34 of the Tax ode the lands sold to the
farmers are capital assets, and the gain derived from the sale thereof is capital
gain, taxable only to the extent of 50%.

3. Deductions must be proven by the taxpayer to be reasonable, ordinary and necessary
and must be incurred in connection to the business.
O Tickets for banquet in Honor of Sergio Osmena no connection to the business
O Civic Groups (organized by Herald) for needy Herald not a corporation but an
association for charity
O Contributions (Our Lady of Fatima at FEU) FEU gives dividends and Fatima
has not shown to belong to Church

A contribution to the government entity is valid as deductions if used EXCLUSVELY
for public purposes.
O Christmas Funds (Pasay & Baguio Police, Pasay Fireman) Not for public
purpose, gifts to families of public officials
O Contributions (Manila Police Trust Fund) intended to be used for public
purpose

Dispositive Portion:
WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to
pay the sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas,
Eduardo Roxas and Jose Roxas are ordered to pay the respective sums of P109.00,
P91.00 and P49.00 as their individual deficiency income tax all corresponding for the year
1955. No costs. So ordered.
Jardine Davies v. CTA
CTA Case No. 5738
August 1, 2000

(Case not found)

BIR RUI. No. 37-98

Facts:

Jardine Davies nc. (JD), a domestic corporation, sold earlier last year some shares of
stock classified as capital assets and sustained capital losses as a result of the sale; that
during the same taxable year, JD sold again some shares of stock classified as capital
assets and derived capital gains as a result of the sale; that JD now wishes to deduct the
capital losses earlier sustained during the taxable year from the capital gains earned during
the same taxable year and pay the tax imposed in then Section 24(e)(2) of the Tax Code,
as amended, on net capital gains derived from the sale or exchange of shares of stock in a
domestic corporation not traded through a local stock exchange

Issue:
requesting for a ruling that capital losses sustained during the taxable year from sales or
exchanges of shares of stock classified as capital assets may be deducted currently (as
opposed to year-end) from capital gains derived during the same taxable year from sales or
exchanges of shares of stock classified as capital assets

HeId:
et capital gain. The term 'net capital gain' means the excess of the gains from sales or
exchanges of capital assets over the losses from such sales or exchanges.

t is clear from 27(D)(2) that what is being taxed is only the "net capital gains" realized from
the sales or exchange or other disposition of shares of stock not traded through a local
stock exchange. f the legislature had intended to impose the tax on "capital gains", it would
not have added the word "net" before "capital gains" in then Section 24(e)(2) of the Tax
Code, as amended.

Consistent with the statutory provision imposing a 10%-20% tax on net capital gains
realized from the sale or exchange or other disposition of shares of stock not traded
through a local stock exchange, the Bureau of nternal Revenue itself designed and
prescribed BR Form No. 1701 E-2, Revised April 1994, which every person making such
sale or exchange or other disposition of shares of stock in a domestic corporation (not
traded through a local stock exchange) is required to file within thirty (30) days after each
sale or exchange or other disposition. The Capital Gains Tax Return thus takes into
account, in determining the capital gains tax due on the stock transaction covered by the
tax return, prior capital gains/loss realized during the year. This is of course logical
inasmuch as the tax is imposed by law on the net capital gains, meaning the excess of the
gains from sales or exchanges of shares of stock classified as capital assets over the
losses from such sales or exchanges. Thus, the requirement of filing Capital Gains Tax
Return after each stock transaction is not inconsistent with the intention of the law to
impose the tax on net capital gains.

Furthermore, the legal requirement of filing a final consolidated return covering all stock
transactions during the taxable year does not mean that prior capital losses during the year
may only be deducted from capital gains when such final consolidated return is filed at the
close of the taxable year. Then Section 45(d) of the Tax Code requires, in addition to the
filing of the capital gains tax return within thirty (30) days after each stock transaction, the
filing of a final consolidated return of all transactions during the taxable year on or before
the fifteenth day of the fourth month following the close of the taxable year.

BIR RuI. 014-03

Wendell Holdings Co., nc. is a corporation that was principally organized to raise
investment funds either through borrowings, sale or lease of its capital assets. t is neither a
real estate dealer nor a property developer. The main objective of the company for the year
is to raise around 4 billion pesos of funds to be extended to its sister companies and
associates in the form of loans or advances for them to carry out their contract/commitment
18
with the government. One of its sister companies has an ongoing reclamation project for
the Public Estates Authority. Once the project is completed, it is expected that PEA will take
over assets estimated to have a land value of around 10 to 15 billion pesos undertaken at
zero costs to the government. From the completed reclamation project, the government can
now generate additional millions of pesos in income in the form of real estate, business
taxes, etc. arising from business transactions in the area.

Wendell Holdings Co., nc. is currently in serious negotiation to sell around 15 hectares of
raw land in stages of 5 hectares each.

The property is being negotiated for a price of Php30,000.00 per square meter payable in
installment with a 25% down payment with the balance payable over a five-year period.
nstallment plan is being considered because the buyers would like to ensure that
infrastructure will be in place before full payment is made. The buyer would also like to
have the title transferred in its name upon payment of the down payment. The balance of
the payment will be placed in escrow and released progressively or covered by a payment
guarantee of the buyer.

Issue:
Whether or not the contemplated sale is subject to 6% Capital Gains Tax under 27(D)(5) of
the NRC.

HeId:

Section 27 (D) (5) of the Code provides:
"(5) apital Gains realized from the Sale, Exchange or Disposition of Lands
and/or uildings. A final tax of six percent (6%) is hereby imposed on the gain
presumed to have been realized on the sale, exchange or disposition of lands
and/or buildings which are not actually used in the business of a corporation and
are treated as capital assets, based on the gross selling price or fair market value
as determined in accordance with Section 6(E) of this Code, whichever is higher,
of such land and/or buildings."

t is apparent under the foregoing provision that for a property to be considered an ordinary
asset it must be actually used in the business of the corporation. Accordingly, on the
condition that Wendell Holdings Co., nc. is not habitually engaged in the real estate
business as represented, the property under consideration is a capital asset. The property
was neither held primarily for sale to customers nor actually used in the business of
Wendell Holdings Co., nc. The property was acquired from D.M. Wenceslao & Associates
as payment for the cash advances of the latter from the former in the reclamation of the
said property. The property is not actually used in the business of Wendell Holdings Co.,
nc. as it has remained idle and undeveloped. Therefore, the sale of the property under
consideration is a sale of a capital asset, not an ordinary asset. As such, the transaction is
subject to capital gains tax of 6% under Section 27(D)(5) and not to the creditable
withholding taxes.

BIR RuIing 104-08

ELYSUM is a holding company. t does not engage in Real Estate dealership or
development. ELYSUM is the registered owner of a real property known as Unit 11 of
Tropical Townhomes in Quezon City covered by Condominium Certificate of Title (CCT)
No. 4110. The said property has never been used by ELYSUM in its trade or business, nor
subjected to depreciation, nor held primarily for sale or lease to customers in the ordinary
course of business, and never been offered for rent or actually leased to anybody since its
acquisition. ELYSUM did not derive any income at all from the said property. As such,
ELYSUM has always treated the said property as capital asset; and that it is of the position
that the eventual sale of the said realty shall only be subject to 6% capital gains tax and
1.5% documentary stamp tax under Sections 27 (D) (5) and 196 of the nternal Revenue
Code of 1997.

Issue:
Whether the sale of the real property which has long been idle and not used in business
should be classified as a capital asset and, therefore, subject to the 6% capital gains tax
and 1.5% documentary stamp tax but exempt from the 12% value-added tax.

HeId:

t is undisputed that the yardstick for determining whether the property is capital asset or
ordinary asset is the actual use of the said property. Thus, if the property is not actually
used in trade or business of the taxpayer, whether or not connected with his trade or
business, or not held for lease or sale to customers, it will be classified as a capital asset.
Moreover, if the property is merely held for investment purposes and remains vacant and
idle, it is deemed a capital asset.

nasmuch as ELYSUM is not primarily engaged in real estate business, but is merely a
holding company organized to acquire, purchase, own or hold for investment or otherwise
shares of stock, real and personal property, bonds and other securities of any corporation
or entity, it is deemed not engaged in the real estate business. Consequently, the sale of
said real property is not subject to the expanded withholding tax under Revenue
Regulations No. 2-98, as amended, but only to the 6% capital gains tax (CGT) imposed
under Section 27 (D) (5) of the 1997 Tax Code, as amended.

Accordingly, as the property under consideration was neither primarily held for sale or for
lease to customers nor actually used in the ordinary course of trade or business of
ELYSUM, the sale thereof is exempt from the 12% value-added tax (VAT) pursuant to
Section 14 (B) (p) (1) of Revenue Regulations No. 4-2007, implementing Republic Act No.
9337.

BIR DA-277-05

GMC is a domestic corporation and is the registered owner of real property with
improvements situated along Legarda St., Manila with a total area of 2,042.50. Sometime in
the year 2001, the Light Rail Transit Authority (LRTA) filed a omplaint for Eminent Domain
over a portion measuring 804.90 square meters of the said property for the construction
and implementation of Line of the Metro Manila Strategic Mass Rail Transit Development
!roject. The RTC rendered a decision confirming and declaring the legal right of LRTA to
lawfully take possession of the 804.90 square meters of the real property under
consideration.

When LRTA entered the property in 2001 to demolish part of the structure therein, GMC
completely lost its business from the said property because the tenants immediately
relocated and the demolition rendered the property unfit for occupancy.

Issue:
Whether the expropriation sale is subject to expanded withholding tax and VAT.

HeId:

19
n view of the foregoing, and inasmuch as the particular portion measuring 804.90 square
meters of the aforementioned property of your Company had already been abandoned by
the tenants, had become idle from the time that LRTA entered the property, could no longer
be used in the trade or business of GMC, and was subsequently demolished to give way to
the LRTA-Line 2 project, the income derived from the expropriation sale of the specified
portion of the property measuring 804.90 square meters is not subject to the expanded
withholding tax under Section 2.57.2(J) of Revenue Regulations No. 2-98, but only to the
6% capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997 and to the
documentary stamp tax under Section 196 of the Tax Code, based on the gross selling
price or fair market value as determined in accordance with Section 6(E) of the Code,
whichever is higher. Furthermore, the gross receipts derived from the sale of the same is
not subject to value-added tax (VAT), the said sale being involuntary and forced upon only
on the seller by virtue of the exercise of the government's power of eminent domain and
therefore it cannot be said to have been conducted in the course of the taxpayer's trade or
business.

BIR 168-05

WAJAH EMAS is engaged in general construction and other allied businesses except
government projects. WAJAH purchased two (2) parcels of land situated at Naic, Cavite,
intended as the site of a proposed storage house/warehouse. The properties were not
intended for speculative purposes. However due to the economic situation, the company
incurred successive losses which forced it to stop operations since May 1, 2002. From
inception, after they bought the properties, they had remained idle since then. ; they have
not introduced any structures or buildings, not even a perimeter fence. With the further
downtrend of the economy in the Philippines, WAJAH opted to close down the business
since they have not operated for more than two (2) years. Wajah opted to sell the
properties for half the acquisition costs and below the zonal valuation of the place.

Issue:
Whether the sale was subject to Capital Gains tax and VAT.

HeId:

The sale of the 2 parcels of land is a sale of capital asset subject to 6% Capital Gains Tax
under Section 27(D)(5) in relation to Section 39(A)(1) of the Tax Code due to the following:

1. WAJAH EMAS had stopped operations since May 1, 2002, and has no intention
of reviving its business operations. The subject properties had not been used
since inception.

2. The parcels of land are not held by WAJAH EMAS for speculative purpose. n
fact it has sold the properties for half of their acquisition costs and even below
the zonal valuation of the place.

As such, WAJAH EMAS' two (2) parcels of land are properly classified as capital assets
and the sale is subject to capital gains tax at the rate of 6% based on the gross selling price
or current fair market value at the time of the sale, whichever is higher, pursuant to
Sections 27(D)(5) and 39(A)(1) of the Tax Code of 1997. Moreover, the Deed of Sale
embodying the transaction whereby WAJAH EMAS sells, transfers and conveys to the
buyer the subject parcel of land, is subject to documentary stamp tax of 1.5% based on the
consideration or value received or paid for the property, or on its fair market value
whichever is higher, pursuant to Section 196 of the Tax Code.

However, the sale of the subject land is not subject to the 10% Value-Added Tax (VAT)
inasmuch as the subject parcels of land are not held primarily for sale or lease to its
customers nor for use in the ordinary course of its primary trade or business of
construction, the fact being that WAJAH EMAS ceased the said business more than 2
years ago and has no intention of reviving the same. The subject properties are
automatically converted into capital assets by virtue of Revenue Regulations 7-2003.

BIR DA-163-05

t is represented that PG is a gas company involved in the importation and distribution of
liquefied petroleum gas (LPG) and the manufacture and marketing of industrial gases, such
as oxygen and acetylene. PC, on the other hand is PG's mother company and is involved
mainly in the real estate business, i.e., buying raw land, developing them into memorial
parks, subdivisions, business parks and the like, and selling/operating the developed
properties.

PG is undergoing corporate rehabilitation following a creditor-initiated rehabilitation petition
filed with the Regional Trial Court (RTC) of Makati City. The court in its Order dated
October 10, 2003 approved the final rehabilitation plan, whereby PC will invest up to P2.0
billion worth of real estate assets in, PG as equity. The assets to be invested by PC will
consist mainly of memorial park lots. When the investment is completed, PC shall hold
about 98% of the outstanding capital stock of PG. A series of four (4) properties-for-shares
exchange transaction occurred between PC and PG based on the following Subscription
Agreements:
1. Subscription Agreement executed on April 29, 2004 for P525.04 Million;
2. Subscription Agreement executed on June 3, 2004 for P640.00 Million;
3. Subscription Agreement executed on June 25, 2004 for P78.992 Million;
4. Subscription Agreement executed on July 9, 2004 for P160.00 Million;
Each of the exchanges have been certified as exempted from capital gains tax/creditable
withholding tax, donor's tax and value-added tax pursuant to Section 40(C)(2) and (6)(c) of
the Tax Code of 1997. You are of the opinion that the aforestated real estate properties
when transferred to PG shall now be classified as capital assets and not as ordinary
assets.

Issue:
Whether the real assets of PC transferred to PG takes the form of a capital asset.

HeId:

For a property to be considered as a capital asset, it must not be used, or is not being used
in the business of the corporation. The real estate properties transferred by PC to PG
should be classified as capital assets considering that the latter is not engaged in the
business of selling real estate.

PG under its Articles of ncorporation is primarily engaged in the manufacture, production,
purchase, sale and trade of all kinds of liquids and gases and other chemicals and allied
products. For the reason that PG is neither a real estate dealer, real estate developer nor a
real estate lessor, PG can be regarded as a corporation not engaged in the sale of real
estate assets to its customers because its organization and structure is designed and
20
intended only for gas business and as such the aforesaid properties conveyed should not
be treated as an ordinary asset.

t is to be noted that under Sec. 3, par. f, item 3 of Revenue Regulations No. 7-2003 on the
determination of whether a particular real property is a capital asset or ordinary asset, the
law states that:

f. . . . real properties that have been transferred to a buyer/transferee, whether
the transfer is through sale, barter or exchange, inheritance, donation or
declaration of property dividends.

xxx xxx xxx

"3. The real property received in an exchange shall be treated as ordinary asset
in the hands of the transferee in the case of a tax-free exchange by taxpayer not
engaged in real estate business to a taxpayer who is engaged in real estate
business, or to a taxpayer, who even if not engaged in real estate business, will
use in business the property received in the exchange."

The converse of the above-mentioned rule would mean that a real property cannot be an
ordinary asset when received in the hands of a transferee who will not use it in the ordinary
course of its trade or business and, thus, it could only take the other form of asset which is
a capital asset

While it is true that the above-mentioned assets acquired by PG are ordinary assets in the
hands of PC, the same already takes the form of a capital asset when it was transferred by
PC to PG which obviously is a corporation not engaged in the real estate business.

BIR RuI No. DA-420-2005
October 10, 2005

FACTS:
Union Ajinomoto Realty Corporation (UARC) is contemplating to sell its two parcels
of land both situated in Pasig. UARC will sell the property covered by TCT no. 55567 to
Duraville Realty and Development Corp while the property covered by TCT No. 555668 will
be sold to OCTAGON Constuction Corp. and Manila Mahogany Marketing Corp.
The two parcels of land have never been developed or used by UARC in the
ordinary course of its business. Since the time of its acquisition, the lands have remained
vacant and idle and were not held and owned primarily by UARC for sale to customers.
They were never leased to anybody nor actually used in business, and UARC has always
treated them as capital assets.

ISSUES:
3. w/n these two parcels of land are ordinary assets or capital assets

RATIO:
2. Capital assets
When the real estate involved is idle, raw, undeveloped, has never formed part of
the real estate developer's inventory for sale to customers ad has not been used in trade or
business, such real property is properly classified as capital asset subject to a final tax of
6% on the gain presumed to have been realized form the sale or transfer pursuant to Sect
27(D)(5). This rule applies w/n the seller-corporation is engaged in real estate business.
Corollarily , only such properties held by a real estate developer primarily for sale or
lease to customers in the ordinary course of its real estate development business and
therefore, would be properly included in the inventory of such taxpayer if on hand at the
close of the taxable year, or used in his trade or business, are appropriately classified as
ordinary assets.

BIR RULING DA-542-06
September 11, 2006

FACTS:
Prior to its dissolution, MAREDECO acquired real properties in Kalookan, Malabon
and Tondo as part of its investments supposedly intended for speculation as to the later
appreciation of real estate values. MAREDECO, however, had never commenced
commercial operation since the time of its incorporation, thereby leaving the above
acquired properties idle, unproductive and unimproved.
t has been decided by its incorporators to dispose of the idle properties of the
corporation converting the same to cash assets for convenience in the distribution of the
same in the process of liquidation and also, due to the lack of interests of the stockholders
to maintain the same, for the reason that they are spending a huge amount of money
paying real estate taxes rather than benefiting from said properties.

ISSUES:
1. w/n the properties are capital assets

RATIO:
1. Capital assets
Considering that MAREDECO has long been dissolved and that it had never
commenced commercial operations since its incorporation, the subject real properties
registered under MAREDECO's name, are properly treated as capital assets. The sale by
the incorporators of said properties in furtherance of MAREDECO's liquidation, therefore, is
subject to the 6% capital gains tax imposed under Section 27(D)(5) of the Tax Code of
1997, as amended.
Moreover, the sale of the above properties of MAREDECO treated as capital assets
is not subjected to the 10% value-added tax imposed under Sec. 106. However, it is
subject to 1.5% DST imposed under Sec. 196.
Paragraph 2 of ratio

BIR RuIing DA-160-06
March 27, 2006

FACTS:
FSSET is engaged in general construction and allied services. Sometime in 2003,
FSSE acquired real properties as additional contribution form one of its stockholders.
While most of the properties transferred were used by FSSE in its business operations, 6
parcels of real properties were held by corporation as mere investments. From the time of
acquisition up to the present, these properties were not used by the corporation and have
21
been left idle and neither did FSSE earn any income from these properties. FSSE decided
to sell the properties.

ISSUES:
1. w/n they are capital assets

RATIO:
1. Capital assets
The sale of the same shall be subject to the 6% capital gains tax imposed. When
the real estate involved in the sale is idle, raw, undeveloped and has never formed part of
the inventory for sale to customers and has not been used in trade or business, such real
properties are properly classified as capital assets.
Considering that FSSE is not primarily engaged in the real estate business, and
the properties are not used in its trade or business, the sale thereof is not subject to the
10% VAT imposed under Sec 106. However, it is subject to the 1.5% DST imposed under
Sec. 197.
Paragraph 2 of ratio

December 7, 2006

FACTS:
EBECAP has purchased properties purely as capital investment; that it did not enter
into any undertaking for the development of its real properties. Properties acquired : condo
unit, agricultural lands in Bulacan, condo units with parking lots.

ISSUES:
2. w/n the properties acquired are capital assets

RATIO:
2. Capital assets
The yardstick for determining whether the property is capital asset or ordinary asset
is the actual use of the said property. Thus, if the property is not actually used in trade or
business of the taxpayer, whether or not connected with his trade or business, or not held
for lease or sale to customers, it will be classified as a capital asset. Moreover, if the
property is merely held for investment purposes and remains vacant and idle, it is deemed
a capital asset.
Lots or improvements, classified as "investment properties, which are idle,
unproductive and unimproved since the time of acquisition, and do not fall under any of the
assets enumerated, are subject to 6% capital gains tax, DST of 1.5% but exempt from 12%
VAT.

JuIy 19, 2007

FACTS:
Jennifer Rose Po is the owner of 2 condo units and were bought for investment
purposes. The subject units have been idle and not used in business by the owner who is
neither a real estate developer nor a real estate dealer, but are now being offered for sale
for 40k per sq. meter.

ISSUES:
3. w/n the condo units are capital assets

RATIO:
3. Capital assets
The properties of Ms. Po are deemed capital assets considering that the latter is not
engaged in the business of selling or development of real estate. Considering that the 2
condo units have long been idle and have never been used in the business by Ms. Po, and
do not fall under any of the assets enumerated under Sec 39(A)(1) the same should be
properly classified as capital assets for tax purposes.

BIR ruIing DA-349-08
June 11, 2008

FACTS:
TRBECA is a holding company primarily organized to purchase, own or hold for
investment or otherwise shares of stock, real and personal properties, bonds and other
securities of any corporation or entity without engaging in stock brokerage. t is neither a
real estate dealer nor a real estate developer and it has never engaged in the real estate
business. t is the registered owner of a parcel of land in Makati city, the said property has
never been used in its trade or business, nor subjected to depreciation, nor held primarily
for sale or lease to customers in the ordinary course of business.
Paragraph 2 of facts.

ISSUES:
4. w/n the property is a capital asset

RATIO:
4. Yes
The phrase "taxpayers engaged in the real estate business refers collectively to
real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term
"taxpayer not engaged in the real estate business shall refer to persons other than real
estate dealers, real estate developers and/or real estate lessors.
TRBECA is a mere holding company, not primarily engaged in real estate
business, it is deemed not engaged in the real estate business.

BIR RuIing 092-99
JuIy 8, 1999

*cant find the originaI of this ruIing, but I found a summary of it.

FACTS/Issue/Ratio:

Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94 as last
amended by Revenue Regulations No. 2-98, implementing Section 64(B) of the Tax Code
of 1997, does not apply to transfers in complete liquidation where the assets of the
22
liquidating corporation are transferred to its stockholders in exchange for the surrender of
the latter's a shares of stock for cancellation by the corporation. This conveyance is without
consideration. Hence, the transfer by Fundamental Development Corporation of its assets
to its controlling stockholders by way of liquidating dividends, is not subject to the expanded
creditable withholding tax and consequently, to the corporate income tax. Under Section
189 of Revenue Regulations No. 26, a conveyance distributing in liquidation the assets of a
corporation consisting of real estate without consideration to the majority owner of its
capital stock is not subject to the documentary stamp tax imposed under Section 196 of the
Tax Code of 1997. Accordingly, the distribution in liquidation of the assets of Fundamental
Development Corporation to its controlling majority stockholders, is not subject to the
documentary stamp tax prescribed under Section 196 of the Tax Code in 19987. The sale
by the stockholders of Fundamental Development Corporation of the distributed asset
received by them as return in investment immediately after title thereto is transferred to
their names shall be subject to the final capital gains tax imposed under Section 24(D)(1) of
the Tax Code of 1997.

Wise and Co. v. Meer
G.R. No. L-48231
June 30 1947

FACTS:
Wise and Co were stockholders of Manila Wine Merchants. The Board of Directors
of Manila Wine Marchants, LTd (HK Co), recommended to the stockholders that they adopt
resolutions necessary to sell it sbuiness and assets to Manila Wine Merchants (PH Co.) for
the sum of 40k. The HK Co. made a distribution from its earnings for the year 1937 to its
stockholders. As a result of the sale of its business and assets to PH Co, a surplus was
realized and the HK Co. distributed this surplus to the shareholders.
Philippine income tax had been paid by HK Co, on the said surplus form which the
said distributions were made. At a special general meeting of the shareholders of the HK
Co., the stockholders by resolution directed that the company be voluntarily liquidated and
its capital distributed among the stockholders. The appellants duly filed income Tax
Returns, on which the defendant, Meer (CR) made deficiency assessments. Plaintiffs paid
under written protest and sought recovery.

ISSUES:
5. w/n the dividends received are ordinary or liquidating dividends
6. w/n the liquidating dividiends are taxable income
7. w/n the dividends received by alien shareholders are taxable income in the
Philippines

RATIO:
5. Liquidating dividends
t was stipulated in the deed of sale that the sale and transfer of the HK Co., shall
take effect on June 1, 1937. Distribution took place on June 8. They could not consistently
deem all the business and assets of the corporation sold as of June 1, 1937, and still say
that said corporation, as a going concern, distributed ordinary dividends to them thereafter.

6. Yes
When the corporation was dissolved and in process of complete liquidation and its
shareholders surrendered their stock to it and it paid the sums in question to them in
exchange, a transaction took place. The shareholder who received the consideration for the
stock earned that much money as income of his own, which again was properly taxable to
him under the ncome Tax Law.

7. Yes
The HK Co. was at the time of the sale of its business in the Philippines, and the
PH Co., was a domestic corporation domiciled and doing business also in the Philippines.
The HK Co, was incorporated for the purpose of carrying on in the Philippine islands the
business of wine, beer, and spirit merchants and the other objects set out in its
memorandum of association. Hence, its earnings, profits and assets, including those from
whose proceeds the distributions in question were made, the major part of which consisted
in the purchase price of the business, had been earned and acquired in the Philippines. As
such, it is clear that said distributions were income from Philippine sources.

JuIy 9, 1999

FACTS:
The Board of Directors of Fundamental Development Corporation (FDC) and its
stockholders agreed to dissolve the corporation by shortening its corporate life until
December 4, 1998. Hence, the remaining asset of FDC consisting of 1 parcel of land will
be distributed to its stockholders by way of liquidating dividends.

SSUE/S:
1. WON the corporation, in transferring the said parcels of land to its stockholders,
is subject to the corporate income tax and therefore also to the creditable
expanded withholding tax of 6%?
2. WON the corporation is subject to the DST on the document transferring the land
to the controlling majority stockholders?
3. WON the stockholders who sell their distributed asset received by them as return
of investment immediately after title thereto is transferred to their names, subject
to the final capital gains tax imposed under Section 24(D)(1) of the Tax Code of
1997?

RATO:
1. NO. The transfer by FDC of its assets, i.e. 1 parceI of Iand, to its controIIing
stockhoIders by way of Iiquidating dividends is not subject to the
expanded creditabIe withhoIding tax imposed by revenue reguIations. (
R.R. No. 6-85 as amended by R.R. No. 12-94, as Iast amended by R.R. No. 2-
98). ConsequentIy, the same is not subject to the corporate income tax.

The R.R. does not apply to transfers in complete liquidation where the assets of
the liquidating corporation are transferred to its stockholders in exchange of the
latter's shares of stock for cancellation by the corporation. This conveyance is
without consideration.

The transfer by the liquidating corporation of its remaining assets to its
stockholders is not considered as a sale of these assets. Thus, a liquidating
corporation does not realize gain or loss in partial or complete liquidation.

23
2. NO. A conveyance distributing in Iiquidation the assets of a corporation
consisting of reaI estate without consideration to the majority owner of its
capitaI stock is not subject to the DST. (Sec. 189 of R.R. No. 26)

3. YES.

BIR RULING No. 039-02
November 11, 2002

FACTS:
TA Bank of the Philippines, nc. (TA) is a domestic corporation engaged primarily
in commercial banking. All of its outstanding shares are wholly owned by The Manila
Banking Corporation (TMBC), a thrift bank, and its nominees. TA plans to decrease its
authorized capital stock of 5 Billion to about 1M common shares. The plan was that TMBC
will surrender some of the stock it holds (preferred as well as common) in exchange for
Distributed Assets of TA.

SSUE/s:
1. WON TA shall be liable for income tax for its receipt of the surrendered shares,
or its transfer of the distributed assets to TMBC as liquidating dividends?
2. WON DST is due on the surrender by TMBC of the TA shares and the
subsequent cancellation thereof?
3. WON the transfer by TA to TMBC of real property as liquidating dividends is
subject to DST on sale or transfer of real property under Section 196 of the Tax
Code?
4. WON the transfer by TA of its Loan Portfolio to TMBC is subject to DST under
Sec. 180 of the Tax Code?
5. WON the transfer or assignment of any mortgage which stands as security for
TA's Loan Portfolio shall be subject to DST under Sec. 195 of the Tax Code,
based on the outstanding balance of the original loan.
6. WON TMBC shall realize capital gain or loss when it surrenders its shares in TA
in exchange for the assets distributed by TA as liquidating dividends and such
capital gain or loss shall be subject to final tax under Sec. 27(D)(2) of the Tax
Code?

RATO:
1. NO. TA shaII not be IiabIe for income tax either on its receipt of the
surrendered shares, or its transfer of the Distributed Assets to TMBC as
Iiquidating dividends.

The transfer by the liquidating corporation of its remaining assets to its
stockholders is not considered a sale of these assets. Thus, a liquidating
corporation does not realize gain or loss in partial or complete liquidation.
Coveresely, neither is a liquidating corporation subject to tax on its receipt of the
shares surrendered by its stockholders pursuant to a complete or partial
liquidation. (BR Ruling No. 171-92)

2. NO. No DST is due on the surrender and canceIIation of the TA shares.

The surrender of the shares does not constitute a sale, assignment or transfer
because TA is not taking title to the surrendered shares and the shares are
retired and not retained as treasury shares. n effect, TA does not realize any
benefit, as owner or otherwise, from its receipt of the shares.

3. NO. Transfer by TA to TMBC of reaI property is not subject to DST on the
saIe or transfer of reaI property.

Under Sec. 189 of R.R. No. 26, otherwise known as "Documentary Stamp Tax
Regulations, a distribution in liquidation, without consideration, of the assets of a
corporation consisting of real estate is not subject to DST. Accordingly, the
distribution of the assets of TA, consisting of among others, parcels of land, to its
controlling and sole stockholder, TMBC, without monetary consideration, is not
subject to DST.

(However, the notarial certification on this deed or deeds of assignment is subject
to the DST of P15.00 pursuant to Sec. 188 of the Tax Code.)

4. NO. Transfer by TA of its Loan PortfoIio to TMBC is not subject to DST.

Secs. 180 and 198 provide for DST on the renewal or continuance of loan
agreements and promissory notes. The transfer by TA of its Loan Portfolio to
TMBC is not for renewal or continuance. The term "assignment or transfer in
Sec. 198 applies only to "mortgage, lease or policy of insurance.

"renew defined with reference to notes and bonds, the word "renewal imports
a postponement of the maturity of the obligation dealt with, an extension of the
time in which that obligation may be discharged. (BR Ruling No. 041-86).

5. YES. Transfer or Assignment of any mortgage which stands as security for
TA's Loan PortfoIio shaII be subject to DST.

Sec. 198. Stamp tax on assignments and renewals of certain instruments.
Upon each and every assignment or transfer of any mortgage, lease or policy of
insurance, or the renewal or continuance of any agreement, contract, charter, or
any evidence of obligation or indebtedness by altering or otherwise, there shall
be levied, collected and paid a documentary stamp tax, at the same rate as that
imposed on the original instrument.

6. YES. TMBC shaII reaIize capitaI gain or Ioss when TA distributes its assets
as Iiquidating dividends.

The second paragraph of Sec. 73(A) of the Tax Code of 1997 state:
"Where a corporation distributes all of its assets in complete liquidation or
dissolution, the gain realized or loss sustained by the stockholder, whether
individual or corporate, is a taxable income or a deductible loss, as the case may
be.

Liquidating gain or loss is in the nature of capital gain or loss, as the case may
be, and therefore, treated in the manner stated in Sec. 39 of the Tax Code of
1997.

24
Liquidating gain, while characterized as gain from sale or exchange of shares, is
subject to the ordinary income tax rates

provided under Secs. 24 (A)(1), 25(A)(1) and (B) [that is, the 25% rate], 27(A) or
(E), 28(A)(1) or (2) and (B)(1) of the Tax Code of 1997, depending on the status
of the shareholder/stockholder (for instance, whether the shareholder is a
corporation or an individual, resident or non-resident), and not to the 5%/10%
final tax.

A similar treatment has been given to corporate shareholders.

DA-084-2005
March 14, 2005

FACTS:
The Board of Directors of First Christian Development Corporation (FCDC)
unanimously approved to dissolve the corporation by shortening its corporate life with no
single transaction whatsoever, as evidenced by its filing of its income tax return for non-
operation; and that as a result of the dissolution, the assets of the corporation will be
distributed to its stockholders by way of liquidating dividends consisting of condominium
units.

SSUE/S:
1. WON the stockholders of FCDC will realize capital gain or loss?
2. WON the transfer of properties by FCDC to its stockholders by way of liquidating
dividends, as a consequence of the former's complete liquidation, is of subject to
the corporate income tax, creditable withholding tax?
3. DST?

RATO:
1. YES. The stockholders of FCDC shall realize capital gain or loss, as the case
may be, when the latter distributes to the former its remaining assets
(condominium units) as liquidating dividends.

Dividends defined any distribution made by a corporation to its shareholders of
its earnings or profits and payable to its shareholders, whether in money or in
other property;

Where a corporation distributes aII of its assets in compIete Iiquidation or
dissoIution, the gain reaIized or Ioss sustained by the stockhoIder, whether
individuaI or corporate, is a taxabIe income or a deductibIe Ioss, as the
case may be (Sec. 73)

The gain, if any, derived by the individual stockholders consisting of the
difference between the fair market value of the liquidating dividends and the
adjusted cost to the stockholders of their respective shareholdings in the
corporation shall be subject to the ordinary income tax rates provided under
Section 24 (!)(1) of the Tax Code of 1997.

2. No. The conveyance of the condominium units in the form of Iiquidating
dividends is not subject to income tax, on the part of FCDC, either on its
receipt of the surrendered shares, or its transfer of the aforesaid property
to its stockhoIders.

n BR Ruling No. 171-92 dated May 28, 1992, this Office ruled that the
transfer by the liquidating corporation of its remaining assets to its stockholders is
not considered a sale of these assets. Thus, a liquidating corporation does not
realize gain or loss in partial or complete liquidation.

Conversely, neither is a liquidating corporation subject to tax on its receipt of
the shares surrendered by its stockholders pursuant to a complete or partial
liquidation.

3. NO.a distribution in Iiquidation, without consideration, of the assets of a
corporation consisting of condominium units is not subject to DST
imposed under Section 196 of the Tax Code of 1997. Accordingly, the
distribution of the remaining assets of FCDC to its controlling stockholders
without monetary consideration is not subject to DST as prescribed under
Section 196 of the Tax Code of 1997.

OTHER DOCTRINES:

t goes without saying that before the corporation can formally distribute and
return its properties to its stockholders, a clearance must be obtained from the BR
that it has no outstanding tax liabilities. SA

JuIy 15, 2005

FACTS:
Monumento Rail Transit Corporation wants to amend its Articles of ncorporation
in order to grant a proportionate number of the common shares held by each stockholder a
convertibility feature such that these shares while remaining common shares are
convertible into redeemable, preferred shares. The grant of the convertibility feature will
not involve any cash flow and will not change the par value of the shares and the
stockholders proportionate interest in MR. The amended AO will state that in the event the
common shares are converted and MR decides to redeem the said shares, MR will pay for
the redemption through the assignment of its right to receive royalties ("depot royalties)
from MRTDC, a domestic corporation which had previously been granted the right to
construct a railway and to build commercial spaces thereon. The depot royalties represent
rental income from the construction of the commercial premises and shall be paid for a
period of 43.58 years.

However, to date, no commercial center has been developed on the depot by the
contractor and, consequently, no rental income has been derived by MRTDC hence no
depot royalties have been paid by the latter to MR.

MR is now in the process of preparing its application with the SEC for approval of
the above-mentioned amendments to its AO.

RULNG:
25
1. When the common shares heId by MR's stockhoIders are granted
convertibiIity features but without changing the stockhoIders'
proportionate interest and the par vaIue of the shares and without any cash
fIow, MR's stockhoIders wiII not be IiabIe to capitaI gains tax.

The conversion of the common shares into preferred shares shall not be subject to capital
gains tax since the holders thereof merely change the form of their shareholdings from
common shares to preferred shares and they do not realize any gain or economic benefit
therefrom.

Recapitalization has been defined as a readjustment of existing interests in the
rearrangement of the capital structure' of the company, which generally are non-taxable to
both the holders and the issuing corporation.

The exchange of common shares into preferred shares qualifies as a
mere recapitalization and no gain or loss is recognized therefrom.

Likewise, the said reclassification is not subject to the DST provided the new
certificates are issued to the same stockholders and the par value is not higher
than the replaced certificates. Accordingly, no DST wiII be due when the
common shares are recIassified into common shares convertibIe into
redeemabIe, preferred shares since there is neither originaI issuance of
shares nor transfer of shares.

2. Upon conversion of the MR common shares into redeemabIe, prefgerred
shares at par for par pursuant to the conversion feature of the shares, MR's
stockhoIders wiII not be IiabIe for the CGT and the corresponding DST on
the transfer of shares.

The stockholders merely change the form of their shareholdings from preferred to common
shares and they do not realize any gain or economic benefit therefrom. The exchange of
the preferred shares for common shares qualifies as a mere recapitalization no gain or loss
is recognized therefrom.

The said exercise of right to convert by the stockholder can be recorded as a memorandum
not of a sale transaction but of a conversion which is not subject to DST.

3. Upon redemption of the redeemabIe, preferred shares, MR wiII not be IiabIe
for income tax on the transfer of its rights to receive the depot royaIty
rights as payment for the redemption and on its receipt of the surrendered
shares.

The transfer by the liquidating corporation of its remaining assets to its stockholders is not
considered as a sale of assets. Thus, a liquidating corporation does not realize gain or loss
in partial or complete liquidation. Conversely, neither is a liquidating corporation subject to
tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or
partial liquidation.

The redemption may be considered akin to a partial liquidation of a corporation because as
in partial liquidation. Since the amended AO of MR will not provide otherwise, the
redeemable shares so reacquired shall be considered retired and no longer issuable.

4. The transfer by MR of the right to receive the depot royaIties is not a saIe
and, therefore, the same is not subject to VAT.

The transfer by a liquidating corporation of its properties is not made in the course of trade
or business and, thus, the same is not subject to 10% VAT.

5. The DST on the transfer of shares wiII not appIy on the surrender and
canceIIation of the MR shares upon their redemption.

No DST shall be due on the surrender and cancellation of shares in the case of a partial
liquidation. The surrender of the shares does not constitute a sale, assignment or transfer
because the liquidating corporation is not taking title to the surrendered shares and the
shares are retired and not retained as treasury shares. n effect, the liquidating corporation
does not realize any benefit, as owner or otherwise, from its receipt of the shares.

6. The gain, if any, derived by MR's stockhoIders representing the difference
between the fair market vaIue of the right to receive the depot royaIties and
the cost basis of the shares wiII be treated as gain from the saIe or
exchange of shares subject to the ordinary income tax rates provided
under Section 24(A)(1), Section 25(A)(1) and (B), Section 27(A) or (E),
28(A)(1) or (2), or Section 28(B)(1) of the Tax Code, depending on the status
of the stockhoIder.

However, if MR's stockholder is a resident of a tax treaty country which provides for a tax
exemption on capital gains, the gain derived may be exempt from income tax under the
corresponding tax treaty provided that the conditions prescribed for the exemption are
complied with.

Finally, for purposes of determining the gain derived by MR's stockholders from the
redemption of their MR shares, the fair market value of the right to receive the depot
royalties shall be considered. However, inasmuch as MR has not yet received depot
royalties from MRTDC and the depot royalties are based on the rental income with respect
to the commercial center to be developed on the depot, the
fair rental value of the depot as determined by an independent appraiser is acceptable for
determining the fair market value of the right to receive the depot royalties.
Otherwise-stated, the fair rental value of the depot as determined by an independent
appraiser shall be the basis for computing the 5% depot royalties. TSH

JuIy 17, 2007

FACTS:
Hector Moreno Realty Corporation is a domestic corporation engaged n the
business of management, technical and financial consultancy. t has ceased operations
and none of its stockholders wanted to pursue anymore the business for which it was
formed. All of its employees have long been lawfully terminated from service. t is
absolutely free of any liability to any person or to the National Government and
instrumentalities. Therefore, in a Special Stockholders Meeting, it was officially resolved
that the corporation will be dissolved and its properties will be distributed to its stockholders
as liquidating dividends.

RULNG:
The transfer of properties in favor of its sole stockholder as liquidating dividends
is not subject to the following taxes:
26
1. Corporate income tax imposed under Sec. 27 (A)
2. Capital gains tax imposed underSec 27(D)(5)
3. Consequently, to the withholding tax imposed under R.R.No. 2-98, as amended.
4. DST
5. VAT (since from the time it was organized it was never engaged in the sale of
real properties)

The transfer by the liquidating corporation of its assets to its stockholder is not considered a
sale of these assets. Thus, a liquidating corporation does not realize gain or loss in a partial
or complete liquidation, and consequently, the liquidating corporation is not liable for
income tax for said transaction.

The distribution of the assets of the corporation to its stockholder in liquidation of the
business without consideration is viewed as a return of capital to the shareholder.

Furthermore, the stockholders who sell the real properties received by them as liquidating
dividends immediately after titles thereto are transferred to their names are
subject to the final capital gains tax imposed under Section 24 (D) (1) of the Tax Code
of 1997, as amended, in the case of individual distributees and Section 27 (D) (5)
thereof, in the case of corporate distributees.

Further still, the sale of same real properties received by said stockholder/s as
liquidating dividends shall be subject to DST pursuant to Section 196 of the Tax Code
of 1997, as amended.

BIR RULING DA 316-2007
May 29, 2007

FACTS:
Belle Bay City Corporation's (BBCC) Board of Directors and stockholders agreed
to dissolve the corporation by shortening its corporate term. BBCC secured a tax
clearance from the BR as a precondition to its dissolution. SEC approved the proposed
dissolution.
As such BBCC's reclaimed lots were set to be distributed to the stockholders. A
subsequent and final distribution is expected to be made once the Philippine Reclamation
Authority replaces the lots lost by BBCC on account of the re-alignment of Diosdado
Macapagal Avenue.
Meanwhile, the financial statement of BBCC for the years 2004-2005 reflected
negative retained earnings. Therefore, for that matter, BBCC has been in a negative
retained earnings since 1999.

SSUE/S:
1. WON the transfer by BBCC of the reclaimed lots to its stockholders as liquidating
dividends is NOT subject to income tax, creditable withholding tax, and DST?
2. WON the receipt of reclaimed lots, as liquidating dividends, by the shareholders
of BBCC is also NOT subject to income tax since BBCCC, as the dissolved
corporation, has negative retained earnings?

RATO:
1. YES. The transfer by BBCC of the recIaimed Iots to its stockhoIders as
Iiquidating dividends is NOT subject to income tax, creditabIe withhoIding
tax, and DST.
The transfer by the liquidating corporation of its remaining assets to its stockholders is not
considered as a sale of these assets. Thus, a liquidating corporation does not realize gain
or loss in partial or complete liquidation. The conveyance is without any consideration
where the assets of the liquidating corporation are transferred to its stockholders in
exchange for the surrender of the latter's shares of stock.

DST
A conveyance distributing in liquidation the assets of a corporation consisting of real estate
without consideration to an owner of its capital stock is not subject to the DST.

No DST shall be due on thesurrender by stockholders of the shares of stock to BBCC. The
surrender of the shares does not constitute a sale, assignment or transfer because BBCC
is not taking title to the surrendered shares, and the shares are retired and not retained as
treasury shares. n effect, BBCC does not realize any benefit, as owner or otherwise, from
its receipt of the shares.

2. NO. The receipt of recIaimed Iots as Iiquidating dividends by the
stockhoIder, is A TAXABLE INCOME or A DEDUCTIBLE LOSS, AS THE
CASE MAY BE.

The amounts distributed in the liquidation of a corporation shall be treated as payments in
exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the
distributee as other gains or profits.

However, liquidating gain, which is, the difference between the fair market value of the
properties received and the cost basis of the shares to the stockholders derived by an
individual stockholder, is to be treated as the gain from the sale or exchange of shares,
subject, however, not to the 5%/10% final tax rate under Section 24 (C), 25 (A) (3) or (B),
27 (D) (2), 28 (A) (7) (c) and (B) (5) (c) of the Tax Code of 1997, but to the ordinary income
tax rates provided under Sections 24 (A) (1), 25 (A) (1) and (B) [that is, the 25% rate] of the
Tax Code of 1997, depending on the status of the shareholder /stockholder (for instance,
whether the shareholder is a corporation or an individual, resident or non-resident).

Finally, this Office also notes that a similar treatment has been given to corporate
shareholders of a dissolving corporation, in that the liquidating gain realized is subject to
the ordinary corporate income tax rate.

BIR RULING DA-(C-119) 390-2008
November 5, 2008

FACTS:
Luzon Hydro Corporation (LHC) as an operator of a hydroelectric power plant in
the Philippines. t is 50% owned by Phil. Hydropower Corporation (PHC) and 50% by
Pacific Hydro Bakun (PHB), both domestic corporations.
On the other hand, Bakun Power Line Corporation (BPLC) is also a domestic
corporation which is owned 50% by Hedcor, nc. and 50% by PHB.
27
LHC entered into a Poer Purchase Agreement with the National Power
corporation (NPC) for the construction and operation of a power station in Bakun River in
Benguet and locos Sur provinces. Soonafter, LHC entered into an Accession Undertaking
with BPLC and NPC. Under the Accession Undertaking, BPLC became responsible for the
construction of the transmission line.
However, BPLC met with financial difficulties such that it could not sufficiently
discharged its obligations to LHC (i.e. pay the advances extended by LHC in previous
years) and the sub-contractors. LHC condoned BPLC's debts.

SSUES:
1. WON the condonation by LHC of the debt of BPLC is NOT subject to income tax
if after the condonation BPLC remains in a capital deficit position?
2. WON the condonation by LHC of the debt of BPLC is NOT subject to donor's
tax?

RATO:
1. YES. The condonation of the debt of BPLC is NOT subject to income tax.

The condonation of indebtedness will not result to any taxable income if the debtor
continues to remain insolvent after the condonation (BR Ruling No. 076-89).

2. YES. The condonation of debt of BPLC is not subject to donor's tax there
being no donative intent on the part of LHC nad such condonation having
been done soIeIy for business consideration.

August 16, 1985

FACTS:
Ortigas & Company Limited Partnership was organized as a limited partnership
by shares (sociedad comanditaria por acciones). Despite the several amendments to its
articles of partnership after the effectivity date of the New Civil Code on August 30, 1950,
Ortigas & Company Limited Partnership did not convert itself into a partnership under the
provisions of the New Civil Code. Under said articles of partnership, the interest of the
general as well as the limited partners in the partnership are transferable.

Some general and limited partners withdrew or retired from the partnership while the
remaining partners wil continue to conduct and manage the partnership. The retiring
partners were given a pro-rata share to the extent of their respective interests in the assets
of the partnership (consisting of parcels of land, shares of stock in other corporations,
receivable, furniture and fixtures, equipment and vehicles)

SSUE/S: WON Ortigas & company Limited Partnership will be dissolved by the proposed
retirement or withdrawal of some of its general and limited partners?

RATO:
NO. Under the law applicable to the said partnership, i.e. provisions of the Code of
Commerce, retirement or withdrawal of a partner is not a cause of dissolution of a
partnership. Moreover, the Securities and Exchange Commission has ruled that the
retirement or withdrawal of a general or limited partner did not dissolve the said
partnership.

Since the above partnership is not dissolved by the retirement or withdrawal ofsome of its
general and limited partners, no gain or loss is recognized to said partnership including the
remaining partners, on its distribution to the retiring partners of partnership assets in
proportion to their respective interests in said partnership. f ever, only the retiring partner
or partners whose shares are liquidated realize gain or loss upon receipt of retirement or
liquidating payments for their interest in the
partnership property.

When a partner withdraws or retires from a partnership, the tax consequence will differ
depending on whether the retiring partner's interest is liquidated by the payment of
liquidating distributions by the partnership to the retiring partner, or soldto another partner
who may be a continuing/remaining partner or a new partner.

Thus, pursuant to Section 142 of the ncome Tax Regulations implementing Section 35 of
the Tax Code, when a partner retires from a partnership or the partnership is dissolved, he
realizes a gain or loss measured by the difference between the price received for his
interest and the cost to him of his interest in the partnership including in such cost the
amount of his shares in any undistributed net income earned since he became a partner on
which the income tax has been paid. f the partnership distributes its assets in kind and not
in cash, the partner realizes gain or suffers loss according to the market value of the
property received in liquidation.

JuIy 12, 1984

FACTS:
Pilipinas Shell Corporation (PLPNAS) entered into a Purchase Agreement with
all of the shareholders of Basic-Landoil Energy Corporation (BLECOR) with the main
objective of taking over BLECOR's assets. Udner the agreement, PLPNAS will purchase
the entire 100% of the subscribed, issued, and/or outstanding shareholdings in BLECOR.
As sole stockholder and owner of BLECOR, PLPNAS intends to dissolve BLECOR by
surrendering all the BLECOR shares and receive the distribution of all BLECOR assets as
liquidating dividends.

RULNG:
The shareholders-sellers shall be subject to the capital gains tax prescribed under Section
34(g) of the Tax Code as amended by Batas Pambansa Blg. 221 on the net capital gains
derived from the sale of their BLECOR shares to Pilipinas.

On the other hand, as the sole stockholder of BLECOR after its purchase "of the entire one
hundred percent (100%) of the subscribed, issued and/or outstanding shares of stock in
BLECOR", Pilipinas will receive upon the complete liquidation of BLECOR, all the assets of
BLECOR as liquidating dividends thereby realizing capital gains or loss.

The gain, if any, derived by Pilipinas consisting of the difference between the fair market
value of the liquidating dividends and the adjusted cost to Pilipinas of its shareholdings in
BLECOR shall be subject to the ordinary corporate income tax prescribed under Section
24(a) of the Tax Code, as amended.

28
Facts:
Dee Chian Hong & Sons nc. are contemplating to liquidate their company and to distribute
all its properties to all the stockholders after paying all corporate creditors and that the said
properties will be distribute as liquidating dividend in exchange for Dee Chian Hong shares
of stocks

Issue:
1. Will the liquidating dividends be treated as capital gain depending on holding
period?
2. How will the gain be taxed?

HeId:
1. Yes, there will be a capital gain or loss; Gain = (FMV of liquidating dividends
adjusted cost to the stockholders of shareholders of their respective
shareholdings. t is subject to income tax.
2. 50% of gains is reportable if the shares are held for more than 12 months; 100%
if held for less than 12 months.

O ndividual stockholders receiving upon complete liquidation all assets as
liquidating dividends will thereby realize capital gain or loss.
O Gains shall be subject to income tax at rates prescribed under Sec 21 of NRC
O 50% of gains is reportable if the shares are held for more than 12 months; 100%
if held for less than 12 months.

Facts:
Stockholders are considering cessation of Maple Enterprises nc. which engaged in leasing
real estate, termination of existing lease and liquidation of the corporation and distribution
of its net assets which consist of land and building with a total net value of P151, 500 and
advances of stockholders in the amount of P453,494.37. What remains will be turned over
to stockholders and will be entitled to a share in proportion to their equity.

Issue:
1. How will the land and the building be valued for determining gain?
2. Are the stockholders subject to pay 5% capital gains tax if they sell the
aforementioned land or building?

HeId:
1. ndividual stockholders receiving upon complete liquidation all assets as
liquidating dividends will thereby realize capital gain or loss. Gain = (FMV of
liquidating dividends adjusted cost to the stockholders of shareholders of their
respective shareholdings. t is subject to income tax. 50% of gains is reportable if
the shares are held for more than 12 months; 100% if held for less than 12
months.

2. Yes, if they sell it immediately after title is transferred to their names and the
lease is terminated. The basis would be the gross selling price or FMV at time of
sale whichever is HGHER.

Paymentss made by government instrumentalities (UP) on utgoing telecommunication
services are EXEMPT frm 10% overseas communications tax.

O Dy Buncio & Co. and Ong Long & Co. intend to liquidate and distribute assets to
is stockholders. The stockholders will receive assets, which consist mainly of
stocks held in certain corporations.
O The gain derived from the distribution of liquidating dividends resulting to sale or
exchange of stocks held by stockholders shall be subject to final capital gains tax
of 10%
O f the they are closed corporations, the gain shall be taxed at 10% if it is not over
P50k and 20% if over P50k
O They are EXCEMPTED if the proceeds if the liquidating dividends are invested
within 6 months from the date the gains are realized, in new issues of the capital
stock of a commercial bank existing as of Sept. 17, 1980

BIR RuIing No. DA-367-6-24-99
O ANSEAR is a real estate corporation however did not operate and engage in any
real estate business since its registration in SEC. ts sole asset is a parcel of land
in Muntinlupa City. The stockholders are considering dissolution and distribution
of the sole asset to its stockholders in proportion to their equity.
O The distribution of sole asset as liquidating dividends to stockholders shall be
subject to final capital gains tax is capital gain is derived.
O The conveyance of the parcel of land in form of liquidating dividends shall be
subject to Documentary Stamp Tax, the basis of which is the FMV or zonal value
of the property. But is it NOT subject to Creditable Withholding Tax
O if the land is sold immediately after title is transferred to their names and the
lease is terminated, it shall be subject to final capital gains tax.

O Landmate involves in real estate development and owns 12 parcels of land in
Valenzuela. Because of economic crisis, it was forced to retire from business
which remained inactive of 2 years. The stockholders resolved to appoint an
administrator to liquidate and assign aforementioned properties to respective
stockholders as return of their respective investments.
O The capital gain in distribution of liquidating assets shall be subject to Capital
Gains Tax.
O Conveyance of se
O veral parcels of land in form of liquidating dividends shall be subject to DST with
tax base of FMV or Zonal Value, whichever is higher. After payment, the land
may be registered to RoD concerned in the name of the stockholder. But the sale
and conveyance is NOT subject to Creditable Withholding Tax.
lease is terminated, it shall be subject to 6% capital gains tax depending if the
29
seller is a resident individual or corporation.
O As a real estate firm, inventories of its real properties prior to the distribution of
liquidating dividends and existing as od such retirement or cessation of business
shall be subject to VAT.

O Crossroads corporation seeks to liquidate all its assets which includes buildings
and parcels of land. t is in the process of conversion of the building into a
residential condominium wherein the units will be members od the board which is
agreed upon by all of the shareholders.
O The capital gain in distribution of liquidating assets shall be subject to Capital
Gains Tax.
O Conveyance of se
O veral parcels of land in form of liquidating dividends shall be subject to DST with
tax base of FMV or Zonal Value, whichever is higher. After payment, the land
may be registered to RoD concerned in the name of the stockholder. But the sale
and conveyance is NOT subject to Creditable Withholding Tax.
lease is terminated, it shall be subject to 6% capital gains tax depending if the
seller is a resident individual or corporation.
O As a real estate firm, inventories of its real properties prior to the distribution of
liquidating dividends and existing as od such retirement or cessation of business
shall be subject to VAT.

O A taxpayer-claimant of a denied claim for refund/tax credit of unutilized input
taxes relating to VAT zero-rated sales may claim the same as deduction for
income tax purposes if the denial was due to the following reasons:
4 FaiIure to compIy with certain saIes invoicing requirements, such
as faiIure to issue VAT invoice/receipt with the word "zero-rated"
printed thereon, or issuance of invoices/receipts that had not
been registered with the BIR.;
4 FaiIure to show evidence that the input taxes sought to be
refunded were not carried over and appIied against any output
VAT in the succeeding periods.
O Input taxes are assets which are expected to bring benefit to the taxpayer. Denial
by the BR or the Court of the refund application means that the asset has lost its
useful value. Thus, the denied cIaim shouId be treated as a deductibIe Ioss
of property sustained during the taxabIe year. BR Ruling No. DA 591-2004
clarified the provision in Revenue Memorandum Circular No. 42-03 where the
BR provided that denial of claims for refund for failure to comply with sales
invoicing requirements shall be without prejudice to the right of the taxpayer to
charge the input taxes to the appropriate expense account or asset account
subject to depreciation".
O On the other hand, in case the denial was due to faiIure of the taxpayer to
submit supporting VAT invoices/receipts for the purchases giving rise to
the input taxes being refunded, the denied cIaim cannot quaIify as a Ioss
deduction in the year denied. n this ruling, the BR held that purchases not
covered by VAT invoices/receipts shall not give rise to any input tax. The VAT
passed on by the supplier should have formed part of the expense or cost of the
items purchased. Thus, the taxpayer-claimant may avail of the remedy of
amending its income tax return if the three year period for such relief has not yet
prescribed and no letter of investigation covering its income tax liabilities has
been issued yet to the company for the examination of its income tax payments
for the said year.

BIR RuIing No. DA (VAT-004) 050-2008
O The taxpayers obtained a CAR and TCL covering the dacion en pago (dation in
payment) of real property. Subsequently, the taxpayers received Post Reporting
Notices from the BR assessing them deficiency DST, expanded withholding tax
and capital gains tax.
O The BR ruled that since the CAR and TCL were already issued certifying that
corresponding taxes had been fully settled and the transactions were authorized
for registration with the Registry of Deeds, no further tax assessment could be
made out of the said transactions. The transactions are now considered closed
and terminated.
O t is, however, emphasized that while the propriety of the tax payments have
been determined to be in order, this will not preclude the BR from conducting an
investigation in order to determine the correctness of the computation of the
amount of taxes paid.

Taxma Iii D-H

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Taxma Iii D-H

Uploaded by

Copyright:

Available Formats

TAX ON MERGERS AND ACQUSTONS PART D to H

You might also like