Deficiency Income Tax, Surcharge and Penalty of Sabina T. Gomez

October 5, 1960 BIR RULING NO. 460-60 The Regional Director B.I.R. Regional District No. 3 M a n i l a S i r : Returned herewith is the entire docket bearing on the internal revenue tax case of Mrs. Sabina T. Gomez, 1313 Pennsylvania, Malate, Manila, involving the total sum of P8,373.50 as deficiency income tax, surcharge and penalty for the year 1957. The records of this case show that in 1941 the taxpayer inherited from her father a parcel of land with an area of 54,222 square meters located at Angeles, Pampanga. She sub-divided this land into lots for sale. The said lots were sold in 1957 and the net profit derived therefrom to the extent of 50% were returned for income tax purposes as capital gain. Aside from this land in Pampanga, Mrs. Gomez had rental properties in Manila from which she derived an income of P20,451.00 in 1957. With regard to these rental properties, she was duly provided with the requisite privilege tax-receipt as a real estate dealer. This case is submitted to this Office for a ruling on the question of whether or not the sub-divided lots sold in 1957 should be considered, for income tax purposes, as capital or ordinary assets. In resolving the question, we quote hereunder pertinent provisions of the Tax Code. "Sec. 34. Capital gains and losses . (1) Capital assets . The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include 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, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of section thirty; or real property used in the trade or business of the taxpayer." "Sec. 194. Words and phrases defined . . . . (s) "Real estate dealer" includes any person engaged in the business of buying, selling, exchanging, leasing, or renting property as principal and holding himself out as a full or part-time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of four thousand pesos or more a year. Any person shall be considered as engaged in business as real estate dealer by the mere fact that he is the owner or subleasor of property rented or offered to rent for an aggregate amount of four thousand pesos or more a year: Provided, however , That an owner of sugar lands subject to tax under Commonwealth Act Numbered five hundred and sixty-seven shall not be considered as a real estate dealer under this definition. (As amended by Sec. 3, R.A. No. 42; sec. 6, R.A. No. 588; sec. 14, R.A. No. 1612; sec. 9, R.A. No. 2025.)" To say that one is "engaged in a business or occupation" signifies much more than the doing of one act in the line of such occupation. Engaging in the business of selling land means something more than occasional, isolated and casual transaction, rather it imports continuous, regular and substantial acts along that line. Pursuant to Section 194(s) of the Tax Code, a real estate dealer may be a person engaged in the business of selling or leasing property or properties. The location of the properties makes no difference for it is the manner of the transaction that matters in the determination of the question of whether or not the property in question was used in the trade or business of the taxpayer or held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. The taxpayer admits that she sold the property in Pampanga instead of offering the same for rent because she found it more profitable and advantageous that way. When the property in question was sub-divided and sold in 1957, Mrs. Gomez was also having rental properties in Manila from which she realized a considerable amount of rental income. While it may be true that she has never offered the land in Pampanga for rent, which she could have done if the same was also located in Manila, yet the fact is, she disposed of the said land by making a sub-division out of it. In this respect, the disposal of every lot in the aforementioned sub-division became a continuous, regular business for Mrs. Gomez in 1957, that is, in the same year when she was also realizing rental income from her properties in Manila. In view of the foregoing considerations, this Office is of the opinion and so holds that the property in question having been held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business as real estate dealer, is an ordinary asset, hence, taxable in full pursuant to section 34 construed in the light of section 194(s) of the Tax Code. In this connection, you are therefore advised to take proper steps toward the immediate collection from Mrs. Sabina T. Gomez of the sum of P8,373.50 as deficiency income tax, surcharge and penalty for the year 1957. liblex Very truly yours, MELECIO R. DOMINGO Commissioner of Internal Revenue