BIR Ruling

February 12, 1997 MEMORANDUM FOR: The Commissioner SUBJECT : Protested deficiency tax assessment of MR. EDGARDO A. RAMOS involving the amount of P125,982.19 representing deficiency capital gains tax for 1989 covered by Assessment Notice No. FAN-189-91-001217 dated April 2, 1991. cdti FACTS AND BASIS OF THE ASSESSMENT : Precedent facts are as follows: On April 20, 1989, Mr. Edgardo A. Ramos executed a Deed of Sale in favor of Virgie A. Pango, for and in consideration of P500,000.00 over a parcel of land, together with the residential house constructed thereon, with an area of 533 sq. m. more or less located at Rizal Avenue, Central Barangay, Dipolog City and covered by TCT No. T-6462-1457 issued by the Register of Deeds of Zamboanga del Norte and Tax Declaration No. 018-315. The amounts of P25,000.00 as 5% capital gains tax and P5,000.00 as 1% documentary stamp tax were paid by the herein taxpayer on April 20, 1989, as per Confirmation Receipt Nos. B-1632704 and B-16327011, respectively. After the review made by the National Assessment Office, the herein taxpayer was assessed the total amount of P125,982.19 as deficiency capital gains tax based on their opinion that the property sold should be classified as commercial in nature and, therefore, the sale should be treated as a sale of an ordinary asset, not a capital asset. The Reviewer, without any actual investigation conducted presumed that the said real property covered by Tax Declaration No. 165-01-018-02-021 and 13, is an income generating property and as such, the sales transaction consummated is beyond the ambit of Revenue Regulations No. 13-85, since said regulation covers only sales of property. Computations of the deficiency assessment is shown below: Selling Price P500,000.00 Less: Acquisition Cost P76,890.00 Doc. Stamps 5,000.00 81,890.00 Gain from Sale P418,110.00 Tax due thereon P98,426.90 Less: Tax paid 25,000.00 Balance of Tax due P73,426.90 Add: 25% Surcharge 18,356.72 Interest up to 3-31-91 34,198.57 Total Amount Due P125,982.19 In the process of the review and the request of the taxpayer for reinvestigation of his case, the taxpayer was requested to present/submit within ten (10) days from receipt of letter dated May 31, 1991 of the National Assessment Office documentary evidence to dispute the assessment and to execute the Waiver of the Defense of Prescription. cdtech The documentary evidence required from taxpayer were submitted, including the Waiver of the Defense of Prescription duly signed and executed by taxpayer. As part of the taxpayer's evidence, he submitted his Affidavit reiterating among others, his claim as to the nature and status of the subject property as being utilized purely for residential purposes and not for commercial purposes or income generating property, contrary to the findings of the National Assessment Office, BIR. The claim was supported by a Certification of the Assessor's Office, Dipolog City, to the effect that the land covered by Tax Declaration Nos. 018-314 and 018-315 issued in 1980, with an area of 533 sq. m. designated as lot No. 370, Title No. 6462 and the residential house, although situated within the commercial zone is actually residential in nature. ISSUE TO BE RESOLVED : Whether or not the property sold was a capital or ordinary asset. DISCUSSION & FINDINGS : The statutory definition of the term "capital assets" under the Internal Revenue Code shall be held to mean property held by the taxpayer, whether or not connected with his trade or business but does not include the following: 1. Stock in trade of the taxpayer; or 2. 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 3. property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or 4. property used in the trade or business of a character which is subject to the allowance for depreciation provided in subsection (f) of Section 29 of the Tax Code; or 5. real property used in trade or business of the taxpayer. From the aforequoted statutory definition by exclusion of "capital assets" we could glean that all properties not specifically excluded in the statutory definition are regarded as capital assets, the profits from the sale or exchange of which are treated as capital gains. Conversely, all those properties specifically excluded are considered as capital assets and the profits realized therefrom must necessarily be treated as ordinary gains. Thus, the basis of determining whether the profit in question is a capital or an ordinary gain is the statutory definition of a capital asset. The assessment in question arose mainly on the Office assumption that the subject property should be treated as commercial in nature and may be income generating property, consequently, the profit/gain therefrom shall be treated as ordinary asset. We find this contention of the National Assessment Office to be entirely devoid of factual and legal bases since it was based more on speculation and conjecture. First, there was no actual verification and/or finding that the questioned property has been used in business nor as an income generating property by the said taxpayer. This is quite evident in the findings of the National Assessment Office, which we quote, hereunder: "Under pertinent provisions of the Tax Code and implementing regulations on the matter, the property which you sold is classified as commercial in nature and is therefore, considered a sale of ordinary asset not capital asset . Moreover, records available to this Office indicate that the actual use of your real estate property as evidenced by Tax Declaration No. 165-01-018-02-021 and B, may be that of an income generating property . As such, the sale transaction you have consummated is beyond the ambit of Revenue Regulation No . 13-85, which law covers only sales of property . (Emphasis supplied) However, the Certification issued by the Assessor's Office of Dipolog City ascertained that the property in question, though located within the commercial zone, is actually used for residential purpose only. The foregoing fact, to our mind, makes the assessment legally weak being based on mere presumptions and inferences which we believe cannot stand the test of judicial scrutiny. (Zamora vs. CIR, 8 SCRA (163) The Supreme Court in interpreting Section 33 of the Tax Code, as amended (formerly Section 34 of the Tax Code), in the case of Corn Prod. Refining Co. vs. Commissioner 350 U.S. 46, aptly observed ". . . the capital asset provision must not be so broadly applied as to defeat rather than further the purpose of Congress. . . Congress intended that profits and losses arising from the everyday operation of a business be considered as ordinary income or loss rather than capital gains or loss the preferential treatment provided . . . applies to transaction in property which are not the normal source of business income. It was intended to relieve the taxpayers from excessive tax burdens on gains resulting from a conversion of capital investments, and to remove the deterrent effect of these burdens on such conversions. . . Since this section is an exception to the normal tax requirements of the Internal Revenue Code, the definition of capital asset must be narrowly applied and its exclusions interpreted broadly. This is necessary to effectuate the basic Congressional purpose." Thus, based on the facts and records of the case, it is our view that the property sold is a capital asset. Likewise, since the corresponding 5% capital gains tax and 1% documentary stamp tax based on the actual selling price, which is way above the schedular zonal values were already paid, no deficiency tax is due from the subject taxpayer. llcd RECOMMENDATION : All premises considered, it is respectfully recommended that the deficiency capital gains tax assessment issued against the taxpayer covered by Assessment Notice No. FAN-189-91-001217 dated April 2, 1991 involving the amount of P125,982.19 should be withdrawn and cancelled and this case considered closed and terminated. Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) ALICIA L. TOMACRUZ Head Revenue Executive Assistant Legal Service Recommendation-APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue