BIR Ruling

December 10, 1996 MEMORANDUM FOR: The Commissioner We have before us for resolution the protested internal revenue tax case of RUBEN MAGALE involving the amount of P407,100.50 as deficiency income tax for taxable year 1990, inclusive of increments, under Assessment/Demand No. FAR-1-90-93-000712, dated March 28, 1993. aisadc FACTS OF THE CASE On February 28, 1990, spouses Ruben Magale and Fe Valera Magale, for and in consideration of P989,490.00, sold to Salesian Society of St. John Borco, a parcel of land located at Cotcot, Liloan, Cebu, covered by Transfer Certificate of Title No. P-1969 of the Registry of Deeds, Province of Cebu. The BIR classified the sale as sale of ordinary asset and thereafter, issued the following deficiency income tax assessment: Selling P989,490.00 Less: Acquisition Cost Land P9,425.00 Doc. Stamp Tax 9,900.00 19,325.00 Net Taxable Gain P970,165.00 Tax Due Thereon P286,733.00 Less: Tax Paid 49,474.50 Deficiency Income Tax P237,258.50 Add: 25% Surcharge 59,315.00 20% Interest up to 2-26-93 110,527.00 Total Amount Due & Collectible P407,100.50 ========== Taxpayer, through counsel, protested the assessment anchoring its arguments significantly on the defense that the property sold was not an ordinary but a capital asset of the taxpayer and therefore, the profits derived therefrom must necessarily have to be classified as capital gains subject to the 5% capital gains tax. RESOLUTION Under Section 33(a)(1) of the Tax Code, as amended, all classes of property are capital assets , except the following: 1. 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; 2. Property held by the taxpayer primarily for sale to the customers in the ordinary course of his trade or business; 3. Property used in the trade or business which is subject to allowance for depreciation provided in Subsection (f) of Section 29 of the Revenue Code; and 4. Real Property used in the trade or business of a taxpayer. (Araneta vs. CIR, CTA Case No. 1699, November 6, 1970) Properties specifically excluded in the above statutory definition are considered as ordinary assets and the profits on the sale or the exchange thereof are treated as ordinary gains subject to the regular or ordinary income tax. It is our submission that the instant assessment would hold water only if it could be proven that the seller is engaged in the business of buying and selling of realty, or that he is engaged in agri-business; and that the property sold by him falls under any of the above-enumerated exceptions. Sad to say, our assessment is clearly wanting in this respect. It is noted that the assessment is a clear case of jeopardy assessment. Nowhere in the docket do we come across a finding that the same was the result of an investigation conducted by any examiner from the BIR. In the absence of a definite showing of the above-mentioned evidentiary requirements, the land sold should be classified as capital asset of the seller. The aforesaid sale therefore, is subject to the 5% capital gains tax (not the ordinary or regular income tax) and the payment of which, we found, was religiously and correctly made by the taxpayer (p. 15; Docket). LexLib Premised on all the foregoing, it is respectfully recommended that the subject deficiency income tax assessment issued against RUBEN MAGALE be withdrawn and cancelled and this case considered closed and terminated. Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief Appellate Division I CONCUR: (SGD.) ALICIA P. CLEMENO Assistant Commissioner Legal Service Recommendation Approved: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue