Income Tax Case of Mr. Manuel Y. Cosio

October 19, 1998 BIR RULING NO. 151-98 49 (a) (2) 33, 21 (f), 29-000-00-151-98 MEMORANDUM TO: The Assistant Commissioner Enforcement Service RE : Income Tax Case of Mr . Manuel Y . Cosio This refers to the above-captioned subject originally referred to the Chief, Law Division for resolution of some legal issues. On June 5, 1997, the Law Division has referred this case to the Chief, Tax Fraud Division for immediate investigation per voluntary request of the above-named taxpayer, on the ground that taxpayer's wife, Remedios S. Tan, the named Administratrix of the conjugal property and who allegedly filed on behalf of the subject taxpayer, Mr. Manuel Y. Cosio, the latter's 1996 Individual Income Tax Return, is leaving the country at anytime soon, and thereupon may renege on her obligation to pay the second installment amounting to P3,578,300, which is fifty percent (50%) of the total tax liability in the amount of P7,156,600.00. (Annotation on the taxpayer's Individual ITR states "The taxpayer elects to pay the tax due in two (2) equal installments in the sum of P3,578,300 each; the first paid on this date, the second on July 15, 1997.) The taxpayer-husband and the administratrix-wife have a pending case before the Court for annulment of marriage. The administratrix-wife, with Order from the Court dated July 27, 1995, was able to sell in 1996 the membership seat in the Philippine Stock Exchange registered in the name of the husband, Manuel Y. Cosio. The said seat was owned by the conjugal partnership. Thereafter, the corresponding ITR for 1996 was filed declaring the conjugal partnership income which necessarily included the gain from said sale. The Tax Fraud Division of this Bureau, before they would initiate an investigation, had referred back this case for resolution of the following legal issues: "a) Can the BIR effect the collection of the 2nd installment before the due date on July 15, 1996? "b) Is the gain from sale of membership seat in the Philippine Stock Exchange considered an ordinary income? "c) If the answer to (b) is of the affirmative, is the taxpayer entitled to an optional forty percent (40%) deduction to answer for the expenses? "d) If the membership seat is considered a capital asset, as defined in Section 33 of the NIRC, as amended, then the gain is considered capital gain. What particular provision of the Tax Code shall we apply in determining the tax base and the tax rate? Section 21(d) and (e) of the NIRC provide the answer for capital gains from sale of shares of stock and sales of real property but not gain arising from sale of intangible property such as membership seat?" In reply to the above, please be informed of the following: 1) Pursuant to then Section 49(a)(2) of the Tax Code of 1977 (now Section 56(A)(2) of the Tax Code of 1997), stating that "SEC. 49. Payment and assessment of income tax for individual and corporation . "xxx xxx xxx "(2) Installment payment . When the tax due is in excess of P2,000, the taxpayer other than a corporation may elect to pay the tax in 2 equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties. The law has expressly given the taxpayer an option to pay the tax due exceeding P2,000 in two (2) installments, i.e., the 1st installment due at the time the return is filed and the 2nd installment, on or before July 15 following the close of the calendar year. Thus, before the lapse of the due date for 2nd installment, specifically July 15, 1997, this Office cannot aver delinquency on the part of the taxpayer, which will make assessment proper. The law says "if any installment is not paid on or before the date for its payment", will apply only, if the taxpayer has not paid any of the installment. cdll Likewise, the authority of the Commissioner of Internal Revenue to terminate taxable period under then Section 16(d) of the Tax Code of 1977 (now Section 6(D) of the Tax Code of 1997) shall apply only if Mr. Cosio himself, as the taxpayer, is the one who intends to leave the Philippines before July 15, 1997, and without a person administering his property. Information furnished by the taxpayer-husband on the alleged intention of the wife to leave the country, although might be true, did not give right to this Office, to effect collection of the 2nd installment before July 15, 1997. More so, that taxpayer-husband, is not leaving the country, in which case, this Office can always collect from him when the tax becomes delinquent, that is, after July 15, 1997. While, Complaint-Manifestation filed on April 24, 1997 by the Counsel of the wife, Atty. Hesiquio R. Mallillin, has stated that the amount allotted for the payment of the capital gains tax was being held by the petitioner-wife, Mrs. Remedios S. Tan-Cosio, the same could not be a basis to justify collection of the 2nd installment. If the husband had reason to believe that the administratrix-wife was leaving the country before July 15, 1997, and the money allotted for payment of the tax was being held by the latter, then he should have petitioned the court to order the wife-administratrix to pay the balance of the tax due, instead of requesting this Office to terminate the period within which a taxpayer is allowed to settle the balance of his tax obligation, merely because of his unfounded fear that he shall be the one to pay the 2nd installment. 2) The membership seat in the Philippine Stock Exchange is considered as "capital asset" which is defined as property held by the taxpayer, whether or not connected with his trade or business pursuant to then Section 33(a)(1) of the Tax Code of 1977 (now Section 39(A)(1) of the Tax Code of 1997). The existence of a membership seat in PSE connotes that Mr. Cosio was engaged in business. [" To engage in business " is to follow the employment or occupation which occupies the time , attention , and labor for the purpose of a livelihood or profit . (Semple vs . Guenther , 96 N . W . 895 , 896]) A person who deals in securities or invests in stock market, to monitor the day to day transaction, will have to maintain such seat in the PSE where stocks are being traded. With the said seat are some privileges and rights enjoyed by the member. These rights and privileges are intangible assets, which the taxpayer may never have carried in the books. The gains realized from the subsequent sale of the same should, however, be included in the taxpayer's "Gross Income", as defined in Section 39 of Revenue Regulations No. 2, viz: "SEC. 39. What gross income includes . Gross income includes, in general, compensation for personal and professional service, business income, profits, and income derived from any source whatever, unless exempt from tax by law. In general, income is the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets. . . ." 3) The taxpayer, under then Section 29 of the Tax Code of 1977 (now Section 34 of the Tax Code of 1997), in relation to then Section 21(f) of the same Code, is entitled to certain allowable deductions enumerated therein. The forty percent (40%) optional standard deductions prescribed under the simplified net income taxation scheme (SNITS) of the same Section 29 shall apply only when the cost of goods sold or direct costs are difficult to determine. 4) However, since there is no particular tax rate assigned to gain from the sale of seat in the PSE under the Code, unlike gains from sales of shares of stock or of real property, the taxpayer shall be taxable under then Section 21(f) of the Tax Code, as amended. In view of the above, and considering that the due date to pay the 2nd installment, i.e., July 15, 1997 had already passed, you are hereby directed to conduct the necessary investigation on the matter making this ruling as your basis in determining the correct tax liability of herein taxpayer. (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue