Case Assigned
constitutes capital gain. 32 Since capital gains tax is a tax on
Republic v. Sps. Salvador
Who is Liable to Pay the Capital Gain Tax due to Expropriation
FACTS: Respondents are the registered owners of a parcel of
land with a total land area of 229 square meters, located in
Kaingin Street, Barangay Parada, Valenzuela City.
On November 9, 2011, the Republic, represented by the
Department of - Public Works and Highways (DPWH), filed
a verified Complaint 4 before the RTC for the expropriation
of 83 square meters of said parcel of land (subject property),
as well as the improvements thereon, for the construction of
the C-5 Northern Link Road Project Phase 2
Upon issuance of writ of possession in favour of DPWH,
respondents signified in open court that they recognized the
purpose for which their property is being expropriated and
interposed no objection thereto. 10 They also manifested that
they have already received the total sum of ₱685,349.22 from
the DPWH and are therefore no longer intending to claim any
just compensation.
The RTC likewise directed the Republic to pay respondents
consequential damages equivalent to the value of the capital
gains tax and other taxes necessary for the transfer of the
subject property in the Republic's name.
The RTC also found no justifiable basis to reconsider its
award of Consequential damages in favor of respondents, as
the payment of capital gains tax and other transfer taxes is but
a consequence of the expropriation proceedings.
ISSUE: Whether capital gains tax on the transfer of the
expropriated property can be considered as
consequential damages that may be awarded to
respondents.
RULING: NO, it is not considered as consequential
damage
While it is true that "the determination of the amount of just
compensation is within the court's discretion, it should not be
done arbitrarily or capriciously. [Rather,] it must [always] be
based on all established rules, upon correct legal principles
and competent evidence." 28 The court cannot base its
judgment on mere speculations and surmises.
It is settled that the transfer of property through
expropriation proceedings is a sale or· exchange within the
meaning of Sections 24(D) and 56(A) (3) of the National
Internal Revenue Code, and profit from the transaction
passive income, it is the seller, or respondents in this case,
who are liable to shoulder the tax.
In fact, the Bureau of Internal Revenue (BIR), in BIR Ruling
No. 476-2013 dated December 18, 2013, has constituted the
DPWH as a withholding agent tasked to withhold the 6%
final withholding tax in the expropriation of real property for
infrastructure projects. 11ms, as far as the government is
concerned, the capital gains tax in expropriation proceedings
remains a liability of the seller, as it is a tax on the seller's gain
from the sale of real property. 34
Besides, as previously explained, consequential damages are
only awarded if as a result of the expropriation, the remaining
property of the owner suffers from an impairment or
decrease in value. 35 In this case, no evidence was submitted
to prove any impairment or decrease in value of the subject
property as a result of the expropriation. More significantly,
given that the payment of capital gains tax on the transfer· of
the subject property has no effect on the increase or decrease
in value of the remaining property, it can hardly be considered
as consequential damages that may be awarded to
respondents
Republic v. Soriano
Who is Liable to Pay the Capital Gain Tax due to Expropriation
FACTS: On October 20, 2010, petitioner Republic of the
Philippines, represented by the Department of Public Works
and Highways (DPWH), filed a Complaint3 for expropriation
against respondent Arlene R. Soriano, the registered owner of
a parcel of land consisting of an area of 200 square meters,
situated at Gen. T De Leon, Valenzuela City
May 27, 2011, the RTC ordered the issuance of a Writ of
Possession and a Writ of Expropriation for failure of
respondent, or any of her representatives, to appear despite
notice during the hearing called for the purpose.
According to the RTC, the records of the case reveal that
petitioner adduced evidence to show that the total amount
deposited is just, fair, and equitable. Specifically, in its
Position Paper, petitioner alleged that pursuant to a
Certification issued by the Bureau of Internal Revenue (BIR),
Revenue Region No. 5, the zonal value of the subject
property in the amount of ₱2,100.00 per square meter is
reasonable, fair, and just to compensate the defendant for the
taking of her property in the total area of 200 square meters
RTC then issued an order, ordering petitioner: to pay
defendant Arlene R. Soriano Php2,100.00 per square meter or
the sum of Four Hundred Twenty Thousand Pesos
(Php420,000.00) for the 200 square meters as fair, equitable,
and just compensation with legal interest at 12% per annum
from the taking of the possession of the property, subject to
the payment of all unpaid real property taxes and other
relevant taxes, if there be any and Plaintiff is likewise ordered
to pay the defendant consequential damages which shall
include the value of the transfer tax necessary for the transfer
of the subject property from the name of the defendant to
that of the plaintiff
Petitioner claims that contrary to the RTC’s instruction,
transfer taxes, in the nature of Capital Gains Tax and
Documentary Stamp Tax, necessary for the transfer of the
subject property from the name of the respondent to that of
the petitioner are liabilities of respondent and not petitioner.
ISSUE: Whether petitioner herein is liable to pay the
taxes due by virtue of the expropriation
RULING: NO, it is the seller who is liable to pay
With respect to the capital gains tax, We find merit in
petitioner’s posture that pursuant to Sections 24(D) and
56(A)(3) of the 1997 National Internal Revenue Code
(NIRC), capital gains tax due on the sale of real property is a
liability for the account of the seller
Thus, it has been held that since capital gains is a tax on
passive income, it is the seller, not the buyer, who generally
would shoulder the tax.24 Accordingly, the BIR, in its BIR
Ruling No. 476-2013, dated December 18, 2013, constituted
the DPWH as a withholding agent to withhold the six percent
(6%) final withholding tax in the expropriation of real
property for infrastructure projects. As far as the government
is concerned, therefore, the capital gains tax remains a liability
of the seller since it is a tax on the seller's gain from the sale of
the real estate.
Tomas Calasanz v. CIR and CA
Transmutability of a Capital Asset into Ordinary Asset
FACTS: Petitioner Ursula Calasanz inherited from her father
Mariano de Torres an agricultural land located in Cainta,
Rizal, containing a total area of 1,678,000 square meters. 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 and received a demand for the deficiency
in the amount of P3,561.24 as deficiency income tax on
ordinary gain of P3,018.00 plus interest of P 543.24.
On June 7, 1966, the Tax Court upheld the respondent
Commissioner, hence the appeal
Commissioner maintained that the imposition of the taxes in
question is in accordance with law since petitioners are
deemed to be in the real estate business for having been
involved in a series of real estate transactions pursued for
profit. Respondent argued that property acquired by
inheritance may be converted from an investment property to
a business property if, as in the present case, it was
subdivided, improved, and subsequently sold and the
number, continuity and frequency of the sales were such as to
constitute "doing business." Respondent likewise contended
that inherited property is by itself neutral and the fact that the
ultimate purpose is to liquidate is of no moment for the
important inquiry is what the taxpayer did with the property.
Respondent concluded that since the lots are ordinary assets,
the profits realized therefrom are ordinary gains, hence
taxable in full.
ISSUE: Whether the gain realized from the sale of the
lots are taxable in full as ordinary income or capital
gains taxable at capital gain rates.
RULING: CONSIDERED AS ORDINARY ASSETS,
hence taxable in full as ordinary income
The statutory definition of capital assets is negative in nature.
5 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.
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.
Upon an examination of the facts on record, We are
convinced that the activities of petitioners are
indistinguishable from those invariably employed by one
engaged in the business of selling real estate.
One strong factor against petitioners' contention is the
business element of development which is very much in
evidence. 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.
Another distinctive feature of the real estate business
discernible from the records is the existence of contracts
receivables, which stood at P395,693.35 as of the year ended
December 31, 1957. 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
CBC v. CA
Discussion of Loss Limitation Rule
FACTS: Sometime in 1980, petitioner China Banking
Corporation made a 53% equity investment in the First CBC
Capital (Asia) Ltd., a Hongkong subsidiary engaged in
financing and investment with "deposit-taking" function. The
investment amounted to P16,227,851.80, consisting of
106,000 shares with a par Value of P100 per share.
In the course of the regular examination of the financial
books and investment portfolios of petitioner conducted by
Bangko Sentral in 1986, it was shown that First CBC Capital
(Asia), Ltd., has become insolvent. With the approval of
Bangko Sentral, petitioner wrote-off as being worthless its
investment in First CBC Capital (Asia), Ltd., in its 1987
Income Tax Return and treated it as a bad debt or as an
ordinary loss deductible from its gross income.
Respondent Commissioner of internal Revenue disallowed
the deduction and assessed petitioner for income tax
deficiency in the amount of P8,533,328.04, inclusive of
surcharge, interest and compromise penalty. The
disallowance of the deduction was made on the ground that
the investment should not be classified as being "worthless"
and that, although the Hongkong Banking Commissioner had
revoked the license of First CBC Capital as a "deposit-taping"
company, the latter could still exercise, however, its financing
and investment activities. Assuming that the securities had
indeed become worthless, respondent Commissioner of
Internal Revenue held the view that they should then be
classified as "capital loss," and not as a bad debt expense there
being no indebtedness to speak of between petitioner and its
subsidiary.
The tax court sustained the Commissioner, holding that the
securities had not indeed become worthless and ordered
petitioner to pay its deficiency income tax for 1987 of
P8,533,328.04 plus 20% interest per annum until fully paid.
ISSUE: Whether the “loss” incurred by petitioner herein
can be deducted in their gross income
RULING: NO, it cannot be deducted in their gross
income
Among the deductible items allowed by the National Internal
Revenue Code ("NIRC") are bad debts and losses. An equity
investment is a capital, not ordinary, asset of the investor the
sale or exchange of which results in either a capital gain or a
capital loss. The gain or the loss is ordinary when the property
sold or exchanged is not a capital asset.
Thus, shares of stock; like the other securities defined in
Section 20(t)4 of the NIRC, would be ordinary assets only to a
dealer in securities or a person engaged in the purchase and
sale of, or an active trader (for his own account) in, securities.
In the hands, however, of another who holds the shares of
stock by way of an investment, the shares to him would be
capital assets. When the shares held by such investor become
worthless, the loss is deemed to be a loss from the sale or
exchange of capital assets.
When securities become worthless, there is strictly no sale or
exchange but the law deems the loss anyway to be "a loss
from the sale or exchange of capital assets."5 A similar kind of
treatment is given, by the NIRC on the retirement of
certificates of indebtedness with interest coupons or in
registered form, short sales and options to buy or sell
property where no sale or exchange strictly exists.6 In these
cases, the NIRC dispenses, in effect, with the standard
requirement of a sale or exchange for the application of the
capital gain and loss provisions of the code.
Capital losses are allowed to be deducted only to the extent of
capital gains, i.e., gains derived from the sale or exchange of
capital assets, and not from any other income of the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee
corporation, is a subsidiary corporation of petitioner bank
whose shares in said investee corporation are not intended for
purchase or sale but as an investment. Unquestionably then,
any loss therefrom would be a capital loss, not an ordinary
loss, to the investor.
The exclusionary clause found in the foregoing text of the law
(Section 33(C)) does not include all forms of securities but
specifically covers only bonds, debentures, notes, certificates
or other evidence of indebtedness, with interest coupons or in
registered form, which are the instruments of credit normally
dealt with in the usual lending operations of a financial
institution. Equity holdings cannot come close to being,
within the purview of "evidence of indebtedness" under the
second sentence of the aforequoted paragraph. Verily, it is for
a like thesis that the loss of petitioner bank in its equity
investment in the Hongkong subsidiary cannot also be
deductible as a bad debt. The shares of stock in question do
not constitute a loan extended by it to its subsidiary (First
CBC Capital) or a debt subject to obligatory repayment by the
latter, essential elements to constitute a bad debt, but a long
term investment made by CBC.
In sum, what is involved here are capital losses not bad debts,
and can only be deducted in the capital gain not in any other
sources of income of petitioner herein
CIR v. FILINVEST
Definition of Control in Exchange found under Sec. 40C2
FACTS: Filinvest Development Corp (FDC) is the owner of
outstanding shares of both Filinvest Alabang, Inc. (FAI) and
Filinvest Land, Inc. (FLI) with 80% and 67.42%, respectively.
Sometime in 1996, FDC and FAI entered into a Deed of
Exchange with FLI where both transferred parcels of land in
exchange for shares of stocks of FLI. As a result, the
ownership structure of FLI changed whereby FDC’s
ownership decreased from 67.42% to 61.03% meanwhile FAI
now owned 9.96% of shares of FLI. FLI then requested from
the BIR a ruling to the effect that no gain or loss should be
recognized on said transfer and BIR issued Ruling No.
S-34-046-97 finding the exchange falling within Sec. 34 (c) (2)
(now Sec. 40 (c)(2)) of the NIRC.
Moreover, FDC also entered into a shareholder’s agreement
with Reco-Herrera PTE ltd. (RHPL) for the formation of a
Singapore-based joint venture company called Filinvest Asia
Corp. (FAC). The equity participation of FDC was pegged at
60% subscribing to P500.7M worth of shares of FAC.
On Jan 3, 2000, FDC received assessment notices for
deficiency income tax and deficiency stamp taxes. The
foregoing deficiency taxes were assessed on the taxable gain
realized by FDC on the taxable gain supposedly realized by
FDC from the Deed of Exchange it executed with FAI and
FLI, on the dilution resulting from the shareholder’s
agreement FDC executed with RHPL and with the interest
rate and documentary stamp taxes imposable on the advances
executed by FDC. FAI also received similar assessment on
deficiency income tax relating to the deed of exchange.
They raised the issue that pursuant to BIR Ruling No.
S-34-046-97, no taxable gain should have been assessed from
the deed of exchange and that the BIR cannot impute
theoretical interests on the cash advances of FDC in the
absence of stipulation and that not being promissory notes
such are not subject to documentary stamp taxes.
CIR, for its part, raised that the said transfer of property
resulted to a diminution of ownership by FDC of FLI rather
than gaining further control and as such should not be tax
free. Furthermore, CIR invoked Sec. 43 (now Sec. 50) of
NIRC as implemented by RR No. 2, the CIR is given the "the
power to allocate, distribute or apportion income or
deductions between or among such organizations, trades or
business in order to prevent evasion of taxes."
The CTA opined that CIR was justified in assessing
undeclared interests on the same cash advances pursuant to
his authority under Section 43 of the NIRC in order to
forestall tax evasion.
The CA rendered a decision in favor of FDC cancelling said
assessment, following the conclusion that the deed of
exchange resulted in a combined control of more than 51% of
FLI , hence no taxable gain
ISSUE: Whether FDC met all the requirements found
under Sec. 40C2 hence no taxable capital gain
RULING: YES, it complied with the requirements
hence not taxable
It was admitted in the stipulation of facts that the following
are the requisites: (a) the transferee is a corporation; (b) the
transferee exchanges its shares of stock for property/ies of
the transferor; (c) the transfer is made by a person, acting
alone or together with others, not exceeding four persons;
and, (d) as a result of the exchange the transferor, alone or
together with others, not exceeding four, gains control of the
transferee. Moreover, it is not taxable because the exchange
did not result to a decrease of the ownership of FDC in FLI
rather combining the interests of FDC and FAI result to
70.99% of FLI’s outstanding shares. Since the term "control"
is clearly defined as "ownership of stocks in a corporation
possessing at least fifty-one percent (51%) of the total voting
power of classes of stocks entitled to one vote” then the said
exchange clearly qualify as a tax-free transaction. Therefore,
both FDC and FAI cannot be held liable for deficiency
income tax on said transfer.