Adoption of the Book Value of the Real Property Won in a Raffle as Acquisition Cost for Purposes of the Capital Gains Tax

July 9, 1985 BIR RULING NO. 110-85 34 (h) 000-00 110-85 S i r : Returned to you herewith are the papers relative to the capital gains tax liability of Mr. Teodoro F. Valencia of 7-D Twin Tower, Makati, Metro Manila, which was referred to this Office for a ruling on whether Mr. Valencia can adopt the book value of the real property he won in a raffle as his acquisition cost of said property for purposes of the capital gains tax under Section 34(h) of the Tax Code as amended. It appears that Mr. Valencia won a lot with one (1) townhouse unit located at Gilmore Townhomes, Gilmore Ave., Quezon City covered by TCT No. 321488 in a raffle conducted by the Parents for Education Foundation, Inc.; that he paid the 15% withholding tax based on the amount of P875,000.00 which is the value of the property as stated in the Deed of Assignment executed by the Parents for Education Foundation, Inc., in his favor on August 2, 1984; that on June 20, 1985, Mr. Valencia sold the aforesaid property to Mr. & Mrs. Antonio Hidalgo for the amount of P900,000.00; and that Mr. Valencia is claiming the amount of P875,000.00 as his acquisition cost of the property for capital gains tax purposes. In reply thereto, I have the honor to inform you that when a taxpayer sells or exchanges property at a price exceeding his cost or tax basis, he has realized a taxable gain. Generally, the original or unadjusted basis of property is its cost or the amount paid for the property in cash or in other property or both. (par. 4710, p. 125, 34 Am. Jur. 2d) Thus, if the prize is paid in property of services, the taxpayer must report as his income the current fair value of the prize. The resale value, not the cost to the sponsor of the prize, has been held to be the proper measure of current value. But what counts is resale value at the time of receipt of the prize, not when it is later sold. (Lawrence W. McCoy and Ilo P. McCoy v. CIR, 38 T.C. 841 (A)) In this case, Mr. Valencia received a prize valued at P875,000.00 which was, in fact, taxed to him as income at the rate of 15% based on the total amount thereof pursuant to Section 53(b) in relation to Section 21(c) both of the Tax Code, as amended. Accordingly, for purposes of the capital gains tax under Section 34(h) of the Tax Code as amended by B.P. Blg. 37, the cost basis to Mr. Valencia of his prize consisting of the lot with one townhouse unit upon its subsequent disposition is the amount of P875,000.00 which is the resale or current fair value of the property at the time of his receipt of the prize. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner