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 a total area of 19,000 hectares (Nasugbu Farmlands). The tenantstherein expressed their desire to purchase from the brothers the parcels which theyactually occupied so the government, pursuant to the constitutional mandate to acquirebig landed estate and apportion them among landless tenants, persuaded the brotherssell the same. Roxas y Cia. then agreed to sell 13, 500 hectares of the lands but thegovernment, however, did not have enough funds, so the former allowed the farmers tobuy the lands for the same price but by installment. Subsequently, the CIR demandedfrom the brothers the payment of deficiency income taxes resulting from the sale of thefarmlands and considered the partnership as engaged in the business of real estate,hence, 100% of the profits derived therefrom was taxed. The brothers protested theassessment but the same was denied. On appeal, the Court of Tax Appeals sustainedthe assessment. 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 dealer during the 10-year amortization period. It should be borne inmind that the sale of the Nasugbu farm 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 allocate lands to the landless. However, theGovernment could not comply with its duty for lack of funds so 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 had theGovernment done it itself. For this magnanimous act, the municipal council of Nasugbupassed a resolution expressing the people's gratitude.The power of taxation is sometimes called also the power to destroy. Therefore itshould be exercised with caution to minimize injury to the proprietary rights of ataxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the"hen that lays the golden egg". And, in order to maintain the general public's trust andconfidence in the Government this power must be used justly and not treacherously. Itdoes not conform with Our sense of justice in the instant case for the Government to persuade 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%.

Tuason v. Lingad
(net capital gain) FACTS: In his 1957 tax return the petitioner as before treatedhis income from the sale of the small lots (P119,072.18) ascapital gains and included only thereof as taxable income. Inthis return,

the petitioner deducted the real estate dealer's taxhe paid for 1957. It was explained, however, that the paymentof the dealer's tax was on account of rentals received from thementioned 28 lots and other properties of the petitioner. On thebasis of the 1957

opinion of the Collector of Internal Revenue,the revenue examiner approved the petitioner's treatment of his income from the sale of the lots in question. In amemorandum dated July 16, 1962 to the Commissioner of Internal Revenue,

the chief of the BIR Assessment Departmentadvanced the same opinion, which was concurred in by theCommissioner of Internal Revenue.On January 9, 1963, however, the Commissioner reversedhimself and considered the

petitioner's profits from the sales of the mentioned lots as ordinary gains. ISSUE: Whether the properties in question which the petitioner had inherited and subsequently sold in small lots to other persons should

be regarded as capital assets. NORATIO: As thus defined by law, the term "capital assets"includes all the properties of a taxpayer whether or notconnected with his trade or business, except: (1) stock in tradeor other property

included in the taxpayer's inventory; (2)property primarily for sale to customers in the ordinary courseof his trade or business; (3) property used in the trade or business of the taxpayer and subject to depreciationallowance;

and (4) real property used in trade or business. If the taxpayer sells or exchanges any of the properties aboveenumerated, any gain or loss relative thereto is an ordinarygain or an ordinary loss; the gain or loss from the

sale or exchange of all other properties of the taxpayer is a capitalgain or a capital loss. The sales concluded on installment basis of the subdivided lotscomprising Lot 29 do not deserve a different

characterizationfor tax purposes. The following circumstances in combinationshow unequivocally that the petitioner was, at the time materialto this case, engaged in the real estate business: (1) theparcels of land involved have in

totality a substantially largearea, nearly seven (7) hectares, big enough to be transformedinto a subdivision, and in the case at bar, the said propertiesare located in the heart of Metropolitan Manila; (2) they weresubdivided into

small lots and then sold on installment basis(this manner of selling residential lots is one of the basicearmarks of a real estate business); (3) comparatively valuableimprovements were introduced in the subdivided lots for theunmistakable

purpose of not simply liquidating the estate but of making the lots more saleable to the general public; (4) theemployment of J. Antonio Araneta, the petitioner's attorney-infact, for the purpose of developing, managing, administeringand selling the lots in

question indicates the existence of ownerrealty broker relationship; (5) the sales were made withfrequency and continuity, and from these the petitioner consequently received substantial income periodically; (6) theannual sales

volume of the petitioner from the said lots wasconsiderable, e.g., P102,050.79 in 1953; P103,468.56 in 1954;and P119,072.18 in 1957; and (7) the petitioner, by his own taxreturns, was not a person who can be indubitably adjudged asa stranger to the real

estate business. Under thecircumstances, this Court finds no error in the holding belowthat the income of the petitioner from the sales of the lots inquestion should be considered as ordinary income
DELPHER TRADES CORPORATION vs. IAC G.R. No. L-69259 January 26, 1988 Facts:

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 of lease 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.

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. YES b. 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 follows: [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. 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. Each case 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.

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 in question 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. This agreement 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

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 agreement shall 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 CTA

Howden Vs CIR (taxation from Sources in the Philippines) FACTS:

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 reenacted 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 extent that 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 do business 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:

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.

Net 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.