BIR Ruling

November 16, 1977 Atty. Jose P. Lagrosa 2361 M. Colayco St. Pasay City S i r : This refers to your letter dated January 20, 1977, requesting on behalf of your clients, exemption from the payment of income tax on their capital gains derived from the expropriation of their lots along Don Mariano Marcos Avenue (formerly Commonwealth Avenue), Quezon City. In reply, I have the honor to inform you that it is now well settled that capital gains resulting from the expropriation of real properties are subject to income tax (Gutierrez vs. Collector of Internal Revenue, G.R. No. L-9738 and L-9771, May 31, 1977; 101 Phil. 713). Accordingly, if the compensation received by your clients for the lots expropriated by the government exceeds the cost thereof and the expenses incurred by them on account of the expropriation, then the excess shall be considered their profit, 50% of which shall be subject to income; and in the absence of a law clearly and expressly exempting from income tax gains or profits derived from expropriation of the lots in question, this Office cannot grant your request to exempt your clients from the payment of income tax on their capital gains. As regards your allegation that your clients suffered such losses as (1) the difference between the present market value of the lots and the price paid by the government; (2) the taxes paid by them since 1956 up to the year when the government finally paid them; and (3) deprivation of the exercise of property rights as owners of the lots for the government had already prepared a Subdivision Plan Survey in 1956, suffice it to point out that the basis of income tax to be paid by your clients is the actual gain resulting from the expropriation of their lots, and said gains is arrived at by deducting from the compensation paid by the government for said lots the acquisition cost of the lots and the expenses incurred by them in connection with the expropriation such as court fees, compensation of their lawyers and other related expenses. It is thus clear that your clients are being taxed only on their actual gain or profit. The fact that your clients could have gained more if the lots were not expropriated is not a basis for considering the expropriation as resulting in a loss. So long as the compensation paid for their lots exceeds the acquisition cost thereof and their expenses in connection with the expropriation of said lots, gain is considered realized for income tax purposes. In view thereof, your request is hereby denied for lack of legal basis. Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-P4519-F2828-A-8