BIR Ruling

February 12, 1997 Montilla Law Office 2nd Floor, Casa Maritima 651 Gen. Luna Street Intramuros, Manila Attention: Ms . Francia H . Concepcion Gentlemen : This refers to the protested tax case of your client, ANNABELLE Y. PUEY, of 1897 Sineguelas St., Dasmarias Village, Makati City, involving the amount of P1,470,880.00 as alleged deficiency income tax for 1989 covered by Assessment Notice No. FAR 2-89-93-000922 dated March 4, 1993, computed as follows: cdll Deficiency Income Tax 1989 Selling Price P3,500,000.00 Less: Acquisition Cost 747,813.33 Gain on Sale of Property P2,752,186.67 Tax Due thereon P 910,440.00 Less: Tax previously paid 175,000.00 Deficiency tax due P 735,440.00 Add: Surcharge 183,860.00 Interest 551,580.00 Total amount due P1,470,880.00 ========== The antecedent facts are as follows: 1. The taxpayer, by virtue of a judicial order dissolving the conjugal partnership was adjudged the sole owner of the subject property which was originally constituted as their conjugal home (see Annex A and pp. 46-49); 2. That she decided to go to the United States with her children after the separation and stayed there for two (2) years (see pp. 50-51); 3. Meanwhile, her husband MANUEL PUEY, in her behalf, executed a Contract of Lease with the Secretary of State of the United States covering the same premises; 4. That said contract was for the term beginning August 15, 1986 up to August 14, 1987 but with automatic renewal for two (2) one year periods from August 15, 1987 to August 14, 1989 (see Annex B and pp. 39-41); 5. That when the subject property was sold on March 3, 1989, the parties to the sale transaction agreed to honor and respect the existing lease contract until after the expiration of the term thereof (see pp. 16-18); 6. That the taxpayer only paid the capital gains and documentary stamp taxes appurtenant thereto (see pp. 21-27); LLphil 7. That the taxpayer was assessed for deficiency income tax after determination that the subject property sold was not a capital asset but an ordinary asset; 8. Taxpayer, thru counsel, protested the assessment. After a careful study of the facts of the case as well as the law and jurisprudence involved, this Office has finally ascertained that ANNABELLE PUEY is liable to the above deficiency assessment. Counsel is of the view that an erroneous classification of the property in contention was committed when said property was subjected to the ordinary income tax rate, instead of the 5% capital gains tax, not warranted by the obtaining circumstances, to wit: that it was never the intention of the Pueys to use it in business when they had it constructed; and that it was merely rented out only when the spouses Pueys legally separated and nobody would be staying in the house. Counsel went on to enumerate several indices or factors for purposes of determining whether a property sold is capital or ordinary and reiterated the improper imposition of the ordinary income tax rate. As 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 trade or business of the taxpayer and subject to depreciation allowance; and (4) real property used in trade or business (Section 33 (a) (1), NIRC) The Tax Code's provision on 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, the field of application of the term "capital assets" is necessarily narrow, while its exclusions must be interpreted. broadly. Consequently, 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. (Tuason, Jr. vs. Lingad, 58 SCRA 170) Nonetheless, in the determination of whether a piece of property is a capital asset or an ordinary asset, a careful examination and weighing of all circumstances revealed in each case must be made. LLjur In the case at bar, while it may be conceded that the Pueys' original intention had nothing to do with business when they constituted the family home, the taxpayer's decision to rent out the premises subsequent to her acquisition of ownership over the property in question by virtue of judicial decree, belied the purpose for which it was constituted, thus, the intention shifted, this time, with business in mind. To infer the contrary is anathema to reason. Moreover, as far back as 1986, the taxpayer was receiving rental payments of substantial amounts (see p. 59, provision no. 10), again, proving false and unacceptable its contention that since nobody would be staying thereon by reason of her imminent trip to the United States with her children, she had it rented when she could have disposed of the property even then. In fact, when she returned, she lived with her brother instead of living in her own house, interposing that the property was still being leased, but she could have prevented the renewal of the contract and could have made used of the facilities in her own house when she came back from the United States. Under the circumstances, the taxpayer's sale of the property cannot be characterized as other than sale of non-capital asset. In fine, she had the property used in business. Thus, the taxpayer failed to impress upon this Office the impropriety of the assessment. In view of all the foregoing, your request for reconsideration has to be as it is hereby DENIED. Consequently, you are hereby requested to advise your client to pay the amount of P1,470,880.00 as deficiency income tax for the year 1989, plus interest that may have accrued thereon to the Revenue District Office nearest to her residence/place of business, within thirty (30) days from your receipt hereof; otherwise the collection thereof shall be enforced by means of summary remedies prescribed by law. This constitutes the final decision of this Office on the matter. cdt Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue