Week 6

E. Gains Derived from Dealings in Property

- Secs. 32(A)(3), 39-40, NIRC

• Capital Asset v. Ordinary Asset

- Secs. 24(D), 39, NIRC

- Secs. 132-135, Revenue Regulations No. 2

- Revenue Regulations No. 7-2003

- Tuazon vs. Lingad, G.R. No. L-24248 July 31, 1974

DOCTRINE:

Captial Assets; definition: 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. If the taxpayer
sells or exchanges any of the properties above-enumerated, any gain or loss relative thereto is an ordinary gain or an
ordinary loss; the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a
capital loss.

In the case at bar, Taxpayer operated a substantial rental business of several properties, not only those subject in this
case, such that the Taxpayer had to a real estate dealer's tax. Taxpayer's sales of the several lots forming part of his
rental business cannot be characterized as other than sales of non-capital assets.

FACTS:

The mother of Taxpayer (Petitioner Antonio Tuason) owned a 7 hectare parcel of land located in the City of Manila. She
subdivided the land into twenty-nine (29) lots. Possession of the land was eventually inherited by Taxpayer in 1948.

Taxpayer instructed his attorney-in-fact to sell the lots. Twenty-eight (28) out of the twenty-nine parcels were all sold
easily. The attorney-in-fact was not able to sell the twenty-ninth lot (hereinafter Lot 29) immediately because it was
located at a low elevation.

In 1952, Lot 29 was filled, subdivided and gravel roads were constructed. The small lots were then sold over the years on
a uniform 10-year annual amortization basis. The attorney-in-fact, did not employ any broker nor did he put up
advertisements in the matter of the sale thereof.

In 1953 and 1954 the Taxpayer reported his income from the sale of the small lots (P102,050.79 and P103,468.56,
respectively) as long-term capital gains. The CIR upheld Taxpayer's treatment of this tax.

In his 1957 tax return the Taxpayer as before treated his income from the sale of the small lots (P119,072.18) as capital
gains. This treatment was initially approved by the CIR, but by 1963, the CIR reversed itself and considered the
Taxpayer's profits from the sales of the lots as ordinary gainsc

The CIR assesed a deficiency of P31,095.36 from the Taxpayer.

Contention of Taxpayer: As he was engaged in the business of leasing the lots he inherited from his mother as well other
real properties, his subsequent sales of the mentioned lots cannot be recognized as sales of capital assets but of “real
property used in trade or business of the taxpayer.”
ISSUE/S: Whether or not the properties in question which the Taxpayer had inherited and subsequently sold in small lots
to other persons should be regarded as capital assets.

HELD: No. It is Ordinary Income

As thus defined by law, CAPITAL ASSETS include all 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.

If the taxpayer sells or exchanges any of the properties above, any gain or loss relative thereto is an ordinary gain or an
ordinary loss; the loss or gain 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 old 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 12 months, only 50% of the net capital gain shall be taken into account in
computing the net income.

The Tax Code's provisions on so-called long-term capital gains constitutes a statute of partial exemption. In view of the
familiar and settled rule that tax exemptions are construed in strictissimi juris against the taxpayer and liberally in favor
of the taxing authority, it is the taxpayer's burden to bring himself clearly and squarely within the terms of a tax-
exempting statutory provision, otherwise, all fair doubts will be resolved against him.

In the case at bar, after a thoroughgoing study of all the circumstances, this Court is of the view and so holds that
Petitioner-Taxpayer's thesis is bereft of merit. Under the circumstances, Taxpayer'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 do not deserve a different characterization for tax purposes.

This Court finds no error in the holding that the income of the Taxpayer from the sales of the lots in question should be
considered as ordinary income.

- Calasanz vs. CIR, G.R. No. L-26284, Oct. 9, 1986

FACTS:

Petitioner Calasanz inherited from her father Mariano de Torres an Agricultural land located in Cainta, Rizal. In order to
liquidate her inheritance, Ursula Calasanz had the land surveyed and subdivided into lots. Improvements, such as good
roads, concrete gutters, drainage and lighting system, were introduced to make the lots saleable. Soon after, the lots
were sold to the public at a profit. In their joint income tax return for the year 1957 filed with the Bureau of Internal
Revenue on March 31, 1958, petitioners disclosed a profit of P31,060.06 realized from the sale of the subdivided lots,
and reported fifty per centum thereof or P15,530.03 as taxable capital gains. Upon an audit and review of the return
thus filed, the Revenue Examiner adjudged petitioners engaged in business as real estate dealers required them to pay
the real estate dealer's tax and assessed a deficiency income tax on profits derived from the sale of the lots based on the
rates for ordinary income. On appeal, the Tax Court upheld the respondent Commissioner except for that portion of the
assessment regarding the compromise penalty for the reason that the same cannot be collected in the absence of a valid
and binding compromise agreement.

ISSUES: Whether petitioners are real estate dealers liable for real estate dealer’s fixed tax; and whether the gains
realized from the sale of the lots are taxable in full as ordinary income or capital gains taxable at capital gain rates.

HELD :

The CTA decision is affirmed. The property initially classified as a capital asset may thereafter be treated as an ordinary
asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course
of the taxpayer's trade or business. Section 34[a] [1] of the National Internal Revenue Code broadly defines capital
assets as property held by the Case Digests on TAXATION LAW

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.

If the asset is not among the exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary
assets. 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 salable. 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.

The activities of petitioners are indistinguishable from those invariably employed by one engaged in the business of
selling real estate. One strong factor against petitioners' contention is the business element of development which is
very much in evidence. Petitioners did not sell the land in the condition in which they acquired it. While the land was
originally devoted to rice and fruit trees, it was subdivided into small lots and in the process converted into a
residential subdivision and given the name Don Mariano Subdivision. Extensive improvements like the laying out of
streets, construction of concrete gutters and installation of lighting system and drainage facilities, among others, were
undertaken to enhance the value of the lots and make them more attractive to prospective buyers. The audited financial
statements submitted together with the tax return in question disclosed that a considerable amount was expended to
cover the cost of improvements. As a matter of fact, the estimated improvements of the lots sold reached P170,028.60
whereas the cost of the land is only P 4,742.66. There is authority that a property ceases to be a capital asset if the
amount expended to improve it is double its original cost, for the extensive improvement indicates that the seller
held the property primarily for sale to customers in the ordinary course of his business.

Another distinctive feature of the real estate business discernible from the records is the existence of contracts
receivables, which stood at P395,693.35 as of the year ended December 31, 1957. The sizable amount of receivables in
comparison with the sales volume of P446,407.00 during the same period signifies that the lots were sold on installment
basis and suggests the number, continuity and frequency of the sales. Also of significance is the circumstance that the
lots were advertised for sale to the public and that sales and collection commissions were paid out during the period in
question. Thus, the SC held 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.

- Ferrer vs. Collector, G.R. No. L-16021, August 31, 1962

Doctrine: In 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.

Facts:
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.

Hence, this petition.

Issues: 1.

Whether the Tax Court had jurisdiction over this case; and

2.

Whether or not the sale of the bakery was a sale of capital asset or of individual assets comprising the business

Held:

1. The Supreme Court ruled in the negative. 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. In 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. Internal Revenue Code. In interpreting this latter provision, the United
States Circuit Court of Appeals held in the leading case ofWilliams 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."” In 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. In 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.
WHEREFORE, the decision of the Court of Tax Appeals is hereby affirmed, with costs against the petitioner.

• Treatment of Sale or Exchange of Ordinary Assets

o Treatment of Sale or Exchange of Capital Assets which are not Real Property or

Shares of Stock

- Secs. 39(A), 40, NIRC ; Net Capital Gain and Net Capital Loss; Holding Period

o Treatment of Sale or Exchange of Shares of Stock held as Capital Asset

- Sections 6 -9, Revised Corporation Code (RCC)

- RR 6-2008, April 22, 2008, as amended by RR 16-2012, RR 6-2013 and RR 20-20

Shares of Stocks Traded in PSE

- Sec. 127, NIRC

o Treatment of Sale or Exchange of Real Property held as Capital Asset

Capital Gains Tax on Presumed Gain

- Secs. 6(E), 24(A), 24(D)(1), NIRC

- Revenue Regulations No. 7-2003

- Revenue Memorandum Circular No. 035-17

▪ Foreclosure Sales of Real Property

- Revenue Memorandum Order Nos. 29-86, 16-88, 27-89 and 6-92

- Revenue Regulations No. 4-99

WEEK SIX

Redemption period

F. Business Income/ Income from Exercise of Profession

- Secs. 32(A)(2), 27(E), NIRC

- Secs. 36-38, 43-47, Revenue Regulations No. 2

• Exclusions:

- Income Exempt Under a Treaty

- Income Derived by Governmental/Political Subdivision from Exercise of Essential

Government Function

G. Partner’s Distributive Share of the Gross Income of General Professional Partnerships

- Sec. 32(A)(11), NIRC

H. Exclusions under Special Laws

- RA 9040

III. TAXPAYERS

I. General Principles

- Sec. 23, NIRC

J. Scope of Income Taxation

- Definition of a Taxpayer (Sec. 22(N), NIRC); classification of taxpayers

- Definition of a Person (Sec. 22(A), NIRC)

- Who is a “Person liable to tax”

IV. INDIVIDUALS: CLASSIFICATION, BASES AND RATES

- Sec. 23(A-D), NIRC

- Secs. 1 and 2, Art. IV, 1987 Constitution

o Resident Citizens

- Sec. 23(E), NIRC

o Non-Resident Citizens

- Secs. 22(E), 23(B), NIRC

▪ Overseas Filipino Workers

- Sec. 23(C), NIRC

• Aliens

o Resident Alien

- Secs. 22(F), 24(B), NIRC

- Sec. 5, Revenue Regulations No. 2

o Non-Resident Alien

▪ Non-Resident Alien Engaged in Trade or Business

- Secs. 22(G), 25(A), NIRC

- Revenue Regulations 2-2021

▪ Non-Resident Alien Not Engaged in Trade or Business

- Secs. 25(B), NIRC

• Classifications of Individuals as to income earning

o Compensation earner

- Minimum Wage Earner (Secs. 22(H) and 24, last paragraph, NIRC)

- Coverage of exemption (RR 1-18, RR 8-2018)

- Rank and File Employee

- Managerial/Supervisory Employee

o Self-Employed and/or Professionals (SEPs)

o Mixed income earner

A. Resident Citizens and Resident Aliens; taxation

- In General

- RR 1-2019

- RR 8-2018

- RR 11-2018
- RR 14-2018

- RR 15-2018

- RMO 23-2018

- RMC 32-2018

- RMC 50-2018

- RMC 51-2018

- Taxable Income Taxation

- Gross Income Taxation

-Qualified to Opt for 8%

-Not qualified to 8%

Regular Graduated Rate vs. 8% Option

-Compensation

-Purely Self-Employed and/or Professionals

-Mixed Income Earner

• Passive Income:

• Interest, Royalties, Prizes and Other Winnings

- Secs. 24(B)(1), 22(FF), NIRC

- Revenue Regulations No. 10-98

- Revenue Regulations No. 14-2012, November 7, 2012

- Revenue Regulations No. 1-2019

- Revenue Regulations No. 8-2018

- Revenue Regulations No. 11-2018

• Dividends

- Sec. 24(B)(2), NIRC

- Sec. 73, NIRC

• Capital Gains on Shares of Stocks

- Sec. 24(C), NIRC

- Revenue Regulation No. 6-2008, as amended by Revenue Regulation No. 1-2019, and Revenue

- Regulation No. 8-2018, and Revenue Regulation 20-2020

• Capital Gains on Real Property

- Art. 415, New Civil Code

- Sec. 24(D), NIRC

- Sale of Principal Residence (Sec. 24(D), NIRC)

- Requisites for exemption (Sec. 24(D), NIRC)

- Revenue Regulation No. 8-98

- Revenue Regulation No. 13-99

- Revenue Regulation No. 14-2000

▪ Socialized Housing

– Secs. 19, 20, 32, RA 7279

- Secs. 93, 188, NIRC

B. Non-Resident Citizens (Sec. 22(E), NIRC)

- Revenue Regulation No. 1-2011

C. Non-resident Alien

• engaged in trade or business (Sec. 25(A), NIRC);

- Taxable Income Taxation

- Gross Income Taxation

- Passive Income; Revenue Regulations 2-2021

- Capital Gains Sec. 25(3)

• not engaged in trade or business (Sec. 25(B), NIRC)

- Sec. 25(B)

E. Minimum Wage Earners (MWE)

- Secs. 22(H), 24, NIRC

- Coverage of exemption (RR 10-08, RR 8-2018)

- Soriano v. Secretary of Finance, G.R. No. 184450, January 24, 2017

F. Members of General Professional Partnership

- Sec. 26, NIR