Unnumbered BIR Ruling

February 16, 1998 MEMORANDUM FOR: The Commissioner This refers to the internal revenue tax case of MRS. SOFIA N. SUAREZ, involving the amount of P1,457,002.87 as deficiency income tax for the year 1989, inclusive of surcharge and interest, under Assessment Notice No. FAN 1-89-91-002159, dated June 21, 1991. cdll STATEMENT OF FACTS The taxpayer was the owner of five (5) parcels of land, together with a building, situated at M. Adriatico St., Malate, Manila, known as Lot Nos. 7-D-5-B, 7-D-6-A, 7-D-6-B, 7-D-3, and 7-D-4 of the sub-division plan Psd-3326 of Block No. 610 of the Cadastral Survey of the City of Manila, containing a total area of 1,024.08 square meters, covered by Transfer Certificate of Title No. 187149-Ind. of the Register of Deeds of the City of Manila. The land was declared for real tax purposes under Tax Declaration No. B-078-000631 in the name of Jose A. Narciso. On July 31, 1989, Mrs. Sofia N. Suarez sold the above-described parcels of land to Mr. Edgardo M. Aquino for the sum of P4,000,000.00, as evidenced by a Deed of Absolute Sale registered as Doc. No. 242; Page No. 60; Book No. XLII; Series of 1989 of the Notarial Register of Notary Public Simeon C. Sato. On the same date that the document of sale was notarized, the vendor filed with the Revenue District Office No. 25, South Manila, an Individual Capital Gains Tax Return (BIR Form No. 1701-E). An ocular inspection was then conducted by Revenue Enforcement Officer Rolando Vasallo and Group Supervisor Jaime Concepcion as a result of which a certificate was issued to the effect that the land/improvement which is the subject matter of the deed of sale was a capital asset. Based on the said certification, the capital gains and documentary stamp taxes due were computed and the taxpayer was made to pay the respective amounts of P242,367.00 and P48,480.00 as evidenced by C.R. Nos. B17685837 and B17685792 both dated July 31, 1989. Thereafter, a Certificate Authorizing Registration (BIR Form No. 1954) was issued by Revenue District Officer, Jose K. Dawang of RDO No. 25, South Manila. The action taken by Revenue District Office No. 25 was reviewed by Revenue Officer Evelyn B. Cayetano of the then National Audit Review Division (NARD), who reported as follows: "Property sold was a commercial, therefore, considered as an ordinary asset subject to regular income tax." As a consequence of the above-quoted finding, an assessment notice was issued on June 21, 1991, hence, this protest. DISCUSSION The resolution of the taxpayer's protest hinges on the issue of "whether the parcels of land and improvements sold on July 31, 1989 as evidenced by a Deed of Absolute Sale registered as Doc. No. 242; Page No. 60; Book No. XLII; series of 1989 of the Notarial Public Simeon C. Sato were capital or ordinary 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 34; or real property used in the trade or business of the taxpayer. Using the aforecited definition of capital asset as yardstick , let us now determine whether the properties sold by the taxpayer on July 31, 1989 were capital or ordinary assets by considering the following factors/reasons: (1) Tax Declaration No. B-078-000631 covering the parcels of land sold clearly shows that the land with an area of 1,024.08 square meters, with a market value of P925,210.00 and the improvement thereon, with a market value of P330,000.00 were classified as residential. (2) Transfer Certificate of Title No. 187148-Ind., more particularly the technical description of the land covered thereon clearly states that "all points referred to are indicated on the plan and on the ground by a corner of stone/concrete wall." This description gives truth to the taxpayer's claim that the properties sold were secured by a high hollow block fence and had been used as a family compound or purely for residential purposes, for if the land was used for commercial purposes as insinuated, then it should not have been enclosed by a high concrete fence as this would hamper access into the land and building by customers. (3) The findings submitted by Revenue Enforcement Officer Rolando Vasallo after an ocular inspection conducted on the properties sold, which was concurred by Group Supervisor Jaime Concepcion clearly point to the fact that the land/improvement which was the subject matter of the deed of sale was a capital asset. LLcd On the other hand, the only available piece of evidence, if we may consider this as evidence, that may support the view that the properties sold were ordinary asset is the conclusion made by the reviewing examiner who jotted the following note as part of her findings: Note: Property sold was a commercial, therefore, considered as an ordinary asset subject to the regular income tax. As to how the conclusion was arrived at is quite perplexing for there is nothing in the docket upon which the reviewer may have possibly based such a sweeping determination. We could only surmise that the conclusion came into the fertile mind of the reviewer who might have knowledge that M. Adriatico St., Malate, Manila where the subject real properties are situated is a busy thoroughfare, so all the lands and buildings located therein were presumed used for commercial purposes. This general conclusion however, is baseless and constitutes a blatant disregard of a reality that even in the heart of the far more busy Binondo district, there are still lots and buildings actually used for residential purposes by the rich and affluent Filipino-Chinese businessmen. Between the finding of the investigating examiner which was the result of an actual ocular examination conducted on the properties sold and the conclusion of the reviewing examiner which was arrived without caring to examine the real properties in question, the former deserves more evidentiary weight for the issue involved here is factual and for all we know the actual viewing of the properties concerned is what is determinative of its real classification or nature. The most that we could say then about the reviewer's contention that the land was "commercial" is that it was based on presumption and as known by every well meaning practitioner of taxation, assessments based on presumption/inference are nothing but instruments of harassment designed to intimidate innocent taxpayers. For all intents and purposes, the Appellate Division therefore believes that the properties in question are capital assets. DEFENSE OF PRESCRIPTION : The taxpayer also invoked the defense of prescription alleging that although the assessment was dated June 21, 1991, it was not received by the taxpayer who had transferred residence temporarily at Angeles City after the sale of their old residence on July 31, 1989. As may be gathered from the records, the Warrant of Distraint and/or Levy was constructively served upon the taxpayer at their new residence now which is 241 Santiago St., Alabang Village, Muntinlupa, Metro Manila, on September 16, 1993. (See Memorandum dated September 17, 1993) Accordingly, it was only on said date that the taxpayer knew of the existence of the assessment against her. Faced with the attending facts, what baffles the Appellate Division is the question why our assessment was addressed to the taxpayer's old residence when from the document of sale itself, the capital gains tax return (BIR Form No. 1701-E) filed, the affidavit executed by the taxpayer's husband dated July 31, 1989, the Certificate Authorizing Registration and all other related documents, it is clearly manifested that the taxpayer transferred residence to Angeles City. The transfer is understandable for after disposal of the land and building in M. Adriatico St., the taxpayer would have no more right to occupy the properties disposed of and yet the BIR disregarded all these facts and insisted on sending its assessment to this abandoned address. Under Section 223 (now Section 222) of the Tax Code, the running of the Statute of Limitations on the making of assessment shall be suspended for the period during, which the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected, but, if the taxpayer informs the Commissioner of any change in address, the running of the Statute of Limitations will not be suspended. The Individual Capital Gains Tax Return (BIR Form No. 1701-E) filed by the taxpayer, Deed of Absolute Sale, Affidavit dated July 31, 1989, Certificate Authorizing Registration (BIR Form No. 1954) and other documents related with the sale clearly indicate that taxpayer's address is not 1129 M. Adriatico St., Malate, Manila but Angeles City. There was no need therefore, to notify the Commissioner of any change in address for there was no change of address at all since the beginning of the taxable sales transaction. Such being the case, the prescriptive period within which to assess continues to run from July 31, 1989 when the Individual Capital Gains Tax Return (BIR Form No. 1701-E) was filed and since our Assessment Notice although dated June 21, 1991 was received by the taxpayer only on September 16, 1993 when the Warrant of Distraint and/or Levy was constructively served on her, it could be said that our assessment was filed out of time and is no longer binding on the taxpayer. CONCLUSION/RECOMMENDATION The foregoing observations show that the assessment issued against Mrs. Sofia N. Suarez has no basis in fact and in law. Concededly, it has no chance of surviving before any administrative or judicial forum. In view thereof, it is recommended that Assessment No. FAN 1-89-91-002159 dated June 21, 1991 demanding payment from Mrs. SOPHIA N. SUAREZ of the amount of P1,457,002.87 as deficiency income tax for the year 1989, inclusive of surcharge and interest be withdrawn and cancelled and that this case be considered closed and terminated. Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) ESTHER R. IBAEZ OIC, Assistant Commissioner Recommendation-APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue