Roxas vs Cta

7/27/2019 Roxas vs Cta

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Roxas vs cta

Facts:Antonio, Eduardo and Jose Roxas, brothers and at the same time partners of theRoxas y

Compania, inherited from their grandparents several properties which includedfarmlands with atotal area of 19,000 hectares (Nasugbu Farmlands). The tenantstherein expressed their desireto purchase from the brothers the parcels which theyactually occupied so the government,pursuant to the constitutional mandate to acquirebig landed estate and apportion them amonglandless tenants, persuaded the brotherssell the same. Roxas y Cia. then agreed to sell 13, 500hectares of the lands but thegovernment, however, did not have enough funds, so the formerallowed the farmers tobuy the lands for the same price but by installment. Subsequently, theCIR demandedfrom the brothers the payment of deficiency income taxes resulting from the saleof thefarmlands and considered the partnership as engaged in the business of realestate,hence, 100% of the profits derived therefrom was taxed. The brothers protestedtheassessment but the same was denied. On appeal, the Court of Tax Appeals sustainedtheassessment. Hence, this appeal.

Issue:

Is Roxas y Cia. liable for the payment of deficiency income for the sale of thefarmlands?

Ruling:No. Although they (farmers/ vendees) paid for their respective holdings ininstallment for a

period of 10 years, it would nevertheless not make the vendor Roxas yCia. a real estate dealerduring the 10-year amortization period. It should be borne inmind that the sale of the Nasugbufarm lands to the very farmers who tilled them for generations was not only in consonance with,but more in obedience to the request andpursuant to the policy of our Government to allocatelands to the landless. However, theGovernment could not comply with its duty for lack of fundsso Roxas y Cia. shoulderedthe Government's burden, went out of its way and sold lands directly

to the farmers inthe same way and under the same terms as would have been the case hadtheGovernment done it itself. For this magnanimous act, the municipal council ofNasugbupassed a resolution expressing the people's gratitude.The power of taxation issometimes called also the power to destroy. Therefore itshould be exercised with caution tominimize injury to the proprietary rights of ataxpayer. It must be exercised fairly, equally anduniformly, lest the tax collector kill the"hen that lays the golden egg". And, in order to maintainthe general public's trust andconfidence in the Government this power must be used justly andnot treacherously. Itdoes not conform with Our sense of justice in the instant case for theGovernment topersuade the taxpayer to lend it a helping hand and later on to penalize him for dulyanswering

the urgent call.In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale

inquestion. Hence, pursuant toSection 34 of the Tax Code the lands sold to the farmersare

capital assets, and the gain derived from thesale thereof is capital gain, taxable onlyto the

extent of 50%.


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Tuason v. Lingad

(net capital gain)FACTS:

In his 1957 tax return

the petitioner as beforetreatedhis income fromthe sale of the small

lots (P119,072.18)ascapital gains andincluded only thereof as taxableincome. Inthis return,


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the petitioner deducted

the real estate dealer'staxhe paid for 1957. Itwas explained,

however, that thepaymentof the dealer'stax was on account of

rentals received fromthementioned 28 lotsand other properties of

the petitioner. Onthebasis of the 1957


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opinion of the Collector

of InternalRevenue,the revenueexaminer approved the

petitioner's treatmentof his income from thesale of the lots in

question. Inamemorandum datedJuly 16, 1962 to the

Commissionerof Internal Revenue,


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the chief of the BIR

AssessmentDepartmentadvancedthe same opinion,

which was concurredin by theCommissionerof Internal

Revenue.On January9, 1963, however, theCommissioner

reversedhimself andconsidered the


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petitioner's profits from

the sales of thementioned lots asordinary gains.

ISSUE:Whether the propertiesin question which the

petitioner had inheritedand subsequently soldin small lots to

other persons should


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be regarded as capital

assets.NORATIO:

As thus defined by law,

the term "capitalassets"includes all theproperties of a

taxpayer whether ornotconnected with histrade or business,

except: (1) stock intradeor other property


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included in the

taxpayer's inventory;(2)property primarilyfor sale to customers

in the ordinarycourseof his trade orbusiness; (3) property

used in the tradeor business of thetaxpayer and subject

todepreciationallowance;


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and (4) real property

used in trade orbusiness.

If the taxpayer sells orexchanges any of theproperties above-

enumerated, any gainor loss relative theretois an ordinarygain or

an ordinary loss; thegain or loss from the


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sale or exchange of all

other properties of thetaxpayer is acapitalgain or a capital

loss.

The sales concluded

on installment basis ofthe subdividedlotscomprising Lot 29

do not deserve adifferent


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characterizationfor tax

purposes. Thefollowingcircumstances in

combinationshowunequivocally that thepetitioner was, at the

time materialto thiscase, engaged in thereal estate business:

(1) theparcels of landinvolved have in


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totality a substantially

largearea, nearlyseven (7) hectares, bigenough to be

transformedinto asubdivision, and in thecase at bar, the said

propertiesare locatedin the heart ofMetropolitan Manila;

(2) theyweresubdivided into


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small lots and then

sold on installmentbasis(this manner ofselling residential lots

is one of thebasicearmarks of areal estate business);

(3) comparativelyvaluableimprovementswere introduced in the

subdivided lots fortheunmistakable


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purpose of not simply

liquidating the estatebut of making the lotsmore saleable to the

general public; (4)theemployment of J.

Antonio Araneta, the

petitioner's attorney-in-fact, for the purpose ofdeveloping, managing,

administeringandselling the lots in


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question indicates the

existence of owner-realty brokerrelationship; (5) the

sales were madewithfrequency andcontinuity, and from

these thepetitioner consequentlyreceived substantial

income periodically; (6)theannual sales


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volume of the

petitioner from the saidlots wasconsiderable,e.g., P102,050.79 in

1953; P103,468.56 in1954;and P119,072.18in 1957; and (7) the

petitioner, by his owntaxreturns, was not aperson who can be

indubitably adjudgedasa stranger to the real


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estate business. Under

thecircumstances, thisCourt finds no error inthe holding belowthat

the income of thepetitioner from thesales of the lots

inquestion should beconsidered as ordinaryincomeDELPHER TRADES CORPORATION vs. IAC

G.R. No. L-69259 January 26, 1988

Facts:


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Delfin Pacheco and sister Pelagia were the owners of a parcel of land in Polo (now Valenzuela). On April 3,

1974, they leased to Construction Components International Inc. the property and providing for a right of

first refusal should it decide to buy the said property.

Construction Components International, Inc. assigned its rights and obligations under the contract oflease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of Delfin and

Pelagia. In 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and

defendant Delpher Trades Corporation whereby the Pachecos conveyed to the latter the leased property

together with another parcel of land also located in Malinta Estate, Valenzuela for 2,500 shares of stock of

defendant corporation with a total value of P1.5M.

On the ground that it was not given the first option to buy the leased property pursuant to the proviso in

the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for

reconveyance of the lot.

Trivia lang: Delpher Trades Corp is owned by the Pacheco Family, managed by the sons and daughters of

Delfin and Pelagia. Their primary defense is that there is no transfer of ownership because the Pachecos

remained in control of the original co-owners. The transfer of ownership, if anything, was merely in form

but not in substance.

Issue:

WON the Deed of Exchange of the properties executed by the Pachecos and the Delpher Trades

Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the Hydro Phils

right of first refusal over the leased property included in the deed of exchange? NO

Held:

By their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their

equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group.

In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was

to invest their properties and change the nature of their ownership from unincorporated to incorporated

form by organizing Delpher Trades Corporation to take control of their properties and at the same time

save on inheritance taxes.

The Deed of Exchange of property between the Pachecos and Delpher Trades Corporation cannot be

considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a

third party. The Pacheco family merely changed their ownership from one form to another. The ownership

remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first

refusal under the lease contract.


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CALASANZ v CIR

Facts: Petitioner Ursula Calasanz inherited from her father de Torres an agricultural land located in Rizal with an

area of 1.6M sqm. In order to liquidate her inheritance, Ursula Calasanz had the land surveyed and subdivided into

lots. Improvements, such as good roads, concrete gutters, drainage and lighting system, were introduced to make

the lots saleable. Soon after, the lots were sold to the public at a profit.

In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue on March 31, 1958,

petitioners disclosed a profit of P31,060.06 realized from the sale of the subdivided lots, and reported fifty per

centum thereof or P15,530.03 as taxable capital gains.

Upon an audit and review of the return thus filed, the Revenue Examiner adjudged petitioners engaged in business

as real estate dealers, as defined in the NIRC, and required them to pay the real estate dealer's tax and assessed a

deficiency income tax on profits derived from the sale of the lots based on the rates for ordinary income.

Tax court upheld the finding of the CIR, hence, the present appeal.

Issues:

a. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed tax. YESb. Whether the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains taxable

at capital gain rates. ORDINARY INCOME

Ratio:

The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital assets. Section 34[a]

[1] of the National Internal Revenue Code broadly defines capital assets as fol lows:

[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 tocustomers 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.

The statutory definition of capital assets is negative in nature. If the asset is not among the exceptions, it is a

capital asset; conversely, assets falling within the exceptions are ordinary assets. And necessarily, any gain

resulting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset

involved in the transaction.

However, there is no rigid rule or fixed formula by which it can be determined with finality whether property sold

by a taxpayer was held primarily for sale to customers in the ordinary course of his trade or business or whether it

was sold as a capital asset. Although several factors or indices have been recognized as helpful guides in making a

determination, none of these is decisive; neither is the presence nor the absence of these factors conclusive. Eachcase must in the last analysis rest upon its own peculiar facts and circumstances.

Also a property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination

of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer's

trade or business. Thus, a sale of inherited real property usually gives capital gain or loss even though the property

has to be subdivided or improved or both to make it salable. However, if the inherited property is substantially

improved or very actively sold or both it may be treated as held primarily for sale to customers in the ordinary

course of the heir's business.


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In this case, the subject land is considered as an ordinary asset. Petitioners did not sell the land in the condition in

which they acquired it. While the land was originally devoted to rice and fruit trees, it was subdivided into small

lots and in the process converted into a residential subdivision and given the name Don Mariano Subdivision.

Extensive improvements like the laying out of streets, construction of concrete gutters and installation of lighting

system and drainage facilities, among others, were undertaken to enhance the value of the lots and make them

more attractive to prospective buyers. The audited financial statements submitted together with the tax return inquestion disclosed that a considerable amount was expended to cover the cost of improvements. There is

authority that a property ceases to be a capital asset if the amount expended to improve it is double its original

cost, for the extensive improvement indicates that the seller held the property primarily for sale to customers in

the ordinary course of his business.

Another distinctive feature of the real estate business discernible from the records is the existence of contracts

receivables, which stood at P395,693.35. The sizable amount of receivables in comparison with the sales volume of

P446,407.00 during the same period signifies that the lots were sold on installment basis and suggests the number,

continuity and frequency of the sales. Also of significance is the circumstance that the lots were advertised for sale

to the public and that sales and collection commissions were paid out during the period in question.

Petitioners argument that they are merely liquidating the land must also fail. In Ehrman vs. Commissioner, the

American court in clear and categorical terms rejected the liquidation test in determining whether or not a

taxpayer is carrying on a trade or business The court observed that the fact that property is sold for purposes of

liquidation does not foreclose a determination that a "trade or business" is being conducted by the seller.

One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The sale may be conducted in the

most advantageous manner to the seller and he will not lose the benefits of the capital gain provision of the

statute unless he enters the real estate business and carries on the sale in the manner in which such a business is

ordinarily conducted. In that event, the liquidation constitutes a business and a sale in the ordinary course of such

a business and the preferred tax status is lost.

CIR v RUFINO

FACTS:

The private respondents were the majority stockholders of the defunct Eastern Theatrical Co., Inc., (Old

Corporation). Ernesto Rufino was the president. The private respondents were also the majority and controlling

stockholders of another corporation, the Eastern Theatrical Co Inc., (New Corporation). This corporation was

engaged in the same kind of business as the Old Corporation, i.e. operating theaters, opera houses, places of

amusement and other related business enterprises. Vicente Rufino was the General Manager.

The Old Corporation held a special meeting of stockholders where a resolution was passed authorizing the Old

Corporation to merge with the New Corporation. Pursuant to the said resolution, the Old Corporation, represented

by Ernesto Rufino as President, and the New Corporation, represented by Vicente Rufino as General Manager,

signed a Deed of Assignment providing for the conveyance and transfer of all the business, property assets,

goodwill, and liabilities of the Old Corporation to the New Corporation in exchange for the latter's shares of stock

to be distributed among the shareholders on the basis of one stock for each stock held in the Old Corporation. Thisagreement was made retroactive. The aforesaid transfer was eventually made. The resolution and the Deed of

Assignment were approved in a resolution by the stockholders of the New Corporation in their special meeting.

The increased capitalization of the New Corporation was registered and approved by the SEC.

The BIR, after examination, declared that the merger was not undertaken for a bona fide business purpose but

merely to avoid liability for the capital gains tax on the exchange of the old for the new shares of stock.

Accordingly, deficiency assessments were imposed against the private respondents. MR denied. CTA reversed and

held that there was a valid merger. It declared that no taxable gain was derived by petitioners from the exchange


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of their old stocks solely for stocks of the New Corporation because it was pursuant to a plan of reorganization.

Thus, such exchange is exempt from CGT.

ISSUE/RULING:

W/N the CTA erred in finding that no taxable gain was derived by the private respondents from the questioned

transaction? NO

There was a valid merger although the actual transfer of the properties subject of the Deed of Assignment was not

made on the date of the merger. In the nature of things, this was not possible. Obviously, it was necessary for the

Old Corporation to surrender its net assets first to the New Corporation before the latter could issue its own stock

to the shareholders of the Old Corporation because the New Corporation had to increase its capitalization for this

purpose. This required the adoption of the resolution for the registration of such issuance with the SEC and its

approval. All these took place after the date of the merger but they were deemed part and parcel of, and

indispensable to the validity and enforceability of, the Deed of Assignment.

There is no impediment to the exchange of property for stock between the two corporations being considered to

have been effected on the date of the merger. That, in fact, was the intention, and the reason why the Deed of

Assignment was made retroactive which provided in effect that all transactions set forth in the merger agreementshall be deemed to be taking place simultaneously when the Deed of Assignment became operative.

The basic consideration, of course, is the purpose of the merger, as this would determine whether the exchange of

properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that

the merger" must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the

burden of taxation."

Here, the purpose of the merger was to continue the business of the Old Corporation, whose corporate life was

about to expire, through the New Corporation to which all the assets and obligations of the former had been

transferred. What argues strongly, indeed, for the New Corporation is that it was not dissolved after the merger

agreement. On the contrary, it continued to operate the places of amusement originally owned by the Old

Corporation and continues to do so today after taking over the business of the Old Corporation 27 years ago.

What is also worth noting is that, as in the case of the Old Corporation when it was dissolved, there has been no

distribution of the assets of the New Corporation since then and up to now, as far as the record discloses. To date,

the private respondents have not derived any benefit from the merger of the Old Corporation and the New

Corporation almost 3 decades earlier that will make them subject to the capital gains tax under Section 35. They

are no more liable now than they were when the merger took effect, as the merger, being genuine, exempted

them under the law from such tax.

By this decision, the government is, of course, not left entirely without recourse, at least in the future. The fact is

that the merger had merely deferred the claim for taxes, which may be asserted by the government later, when

gains are realized and benefits are distributed among the stockholders as a result of the merger. In other words,

the corresponding taxes are not forever foreclosed or forfeited but may at the proper time and without prejudice

to the government still be imposed.

PHILIPPINE AMERICAN LIFE INSURANCE CO v CTAHowden Vs CIR

(taxation from Sources in the Philippines)

FACTS:


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Commonwealth Insurance Co. (CIC), a domestic corporation, entered into reinsurance contracts with 32

British companies not engaged in business in thePhilippines represented by herein Plaintiff. CIC remitted

to Plaintiff reinsurance premiums and, on behalf of Plaintiff, paid income tax on the premiums. Plaintiff

filed a claim for a refund of the paid tax, stating that it was exempted from withholding tax reinsurance

premiums received from domestic insurance companies by foreign insurance companies not authorized

to do business in the Philippines. Plaintiffs stated that since Sec. 53 and 54 were substantially re-

enacted by RA 1065, 1291 and 2343,

said rulings should be given the force of law under the principle of legislative approval by re-enactment.

ISSUE:

W/N the tax should be withheld.

HELD:

No. The principle of legislative enactment states that where a statute is susceptible of the meaning

placed upon it by a ruling of the government agency charged with its enforcement and the legislature

thereafter re-enacts the provisions without substantial changes, such action is confirmatory to an extentthat the ruling carries out the legislative purpose. This principle is not applicable for heaforementioned

sections were never re-enacted. Only the tax rate was amended. The administrative rulings invoked by

the CIR were only contained in unpublished letters. It cannot be assumed that the legislature knew of

these rulings. Finally, the premiums remitted were to indemnify CIC against liability. This took place

within the

Philippines, thus subject to income tax

CIR v CTA AND SMITH&FRENCH OVERSEAS

Facts:

Smith Kline & French Overseas Company is a multinational firm domiciled in Philadelphia, licensed to dobusiness in the Philippines. It is engaged in the importation, manufacture, and sale of pharmaceutical

drugs and chemicals.

In 1971, it declared a net taxable income of P1.4 M and paid P511k as tax due. It claimed its share of the

head office overhead expenses (P501k) as deduction from gross income. In its amended return, it

claimed that there was an overpayment of tax (P324k) arising from under-deduction of the overhead

expense. This was certified by international independent auditors, the allocation of the overhead

expense made on the basis of the percentage of gross income in the Philippines to gross income of the

corporation as a whole.

In 1974, without waiting for the action of the CIR, Smith filed a petition for review with the CTA. CTA

ordered CIR to refund the overpayment or grant Smith a tax credit. CIR appealed to the SC.

Issue: Whether Smith is entitled to a refund YES

Ratio:


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The governing law is found in Sec. 37 (b).1

Revenue Regulation No. 2 of the DOF contains a similar

provision, with the additional line that the ratable part is based upon the ratio of gross income from

sources within the Philippines to the total gross income (Sec. 160). Hence, where an expense is clearly

related to the production of Philippine-derived income or to Philippine operations, that expense can be

deducted from the gross income acquired in the Philippines without resorting to apportionment.

However, the overhead expenses incurred by the parent company in connection with finance,

administration, and research & development, all of which directly benefit its branches all over the world,

fall under a different category. These are items which cannot be definitely allocated or identified with

the operations of the Philippine branch. Smith can claim as its deductible share a ratable part of such

expenses based upon the ration of the local branchs gross income to the total gross income of the

corporation worldwide.

CIRs Contention

The CIR does not dispute the right of Smith to avail of Sec. 37 (b) of the Tax Code and Sec. 160 of the RR.

But he maintains that such right is not absolute and that there exists a contract (service agreement)

which Smith has entered into with its home office, prescribing the amount that a branch can deduct as

its share of the main offices overhead expenses. Since the share of the Philippine branch has been

fixed, Smith cannot claim more than the said amount.

Smiths Contention

Smith, on the other hand, submits that the contract between itself and its home office cannot amend

tax laws and regulations. The matter of allocated expenses deductible under the law cannot be the

subject of an agreement between private parties nor can the CIR acquiesce in such an agreement.

SC ruled for Smith Kline and said that its amended return conforms with the law and regulations.

1Net income from sources in the Philippines. From the items of gross income specified in subsection (a) of this

section there shall be deducted expenses, losses, and other deductions properly apportioned or allocated thereto

and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item

or class of gross income. The remainder, if any, shall be included in full as net income from sources within the

Philippines.

Roxas vs Cta

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