TUASON vs. LINGAD

[July 31, 1974; G.R. No. L-24248]

CASTRO, J

TOPIC: Ordinary gain, capital asset, NIRC Sec. 39 A (1)

DOCTRINE:

Captial Assets; definition: The term "capital assets" includes all the properties of a taxpayer whether or not connected with his trade or business, except: (1) stock in trade or other property included in the taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of his trade or business; (3) property used in the trade or business of the taxpayer and subject to depreciation allowance; and (4) real property used in trade or business. If the taxpayer sells or exchanges any of the properties above-enumerated, any gain or loss relative thereto is an ordinary gain or an ordinary loss; the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss.

In the case at bar, Taxpayer operated a substantial rental business of several properties, not only those subject in this case, such that the Taxpayer had to a real estate dealer's tax. Taxpayer's sales of the several lots forming part of his rental business cannot be characterized as other than sales of non-capital assets.

FACTS:

The mother of Taxpayer (Petitioner Antonio Tuason) owned a 7 hectare parcel of land located in the City of Manila. She subdivided the land into twenty-nine (29) lots. Possession of the land was eventually inherited by Taxpayer in 1948.

Taxpayer instructed his attorney-in-fact to sell the lots. Twenty-eight (28) out of the twenty-nine parcels were all sold easily. The attorney-in-fact was not able to sell the twenty-ninth lot (hereinafter Lot 29) immediately because it was located at a low elevation.

In 1952, Lot 29 was filled, subdivided and gravel roads were constructed. The small lots were then sold over the years on a uniform 10-year annual amortization basis. The attorney-in-fact, did not employ any broker nor did he put up advertisements in the matter of the sale thereof.

In 1953 and 1954 the Taxpayer reported his income from the sale of the small lots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. The CIR upheld Taxpayer's treatment of this tax.

In his 1957 tax return the Taxpayer as before treated his income from the sale of the small lots (P119,072.18) as capital gains. This treatment was initially approved by the CIR, but by 1963, the CIR reversed itself and considered the Taxpayer's profits from the sales of the lots as ordinary gainsc

The CIR assesed a deficiency of P31,095.36 from the Taxpayer.

Contention of Taxpayer: As he was engaged in the business of leasing the lots he inherited from his mother as well other real properties, his subsequent sales of the mentioned lots cannot be recognized as sales of capital assets but of “real property used in trade or business of the taxpayer.”

ISSUE/S:

Whether or not the properties in question which the Taxpayer had inherited and subsequently sold in small lots to other persons should be regarded as capital assets.

HELD:

No. It is Ordinary Income

As thus defined by law, CAPITAL ASSETS include all properties of a taxpayer whether or not connected with his trade or business, except:

1. stock in trade or other property included in the taxpayer's inventory;
2. property primarily for sale to customers in the ordinary course of his trade or business;
3. property used in the trade or business of the taxpayer and subject to depreciation allowance; and
4. real property used in trade or business.

If the taxpayer sells or exchanges any of the properties above, any gain or loss relative thereto is an ordinary gain or an ordinary loss; the loss or gain from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss.

Under Section 34(b)(2) of the old Tax Code, if a gain is realized by a taxpayer (other than a corporation) from the sale or exchange of capital assets held for more than 12 months, only 50% of the net capital gain shall be taken into account in computing the net income.

The Tax Code's provisions on so-called long-term capital gains constitutes a statute of partial exemption. In view of the familiar and settled rule that tax exemptions are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, it is the taxpayer's burden to bring himself clearly and squarely within the terms of a tax-exempting statutory provision, otherwise, all fair doubts will be resolved against him.

In the case at bar, after a thoroughgoing study of all the circumstances, this Court is of the view and so holds that Petitioner-Taxpayer's thesis is bereft of merit. Under the circumstances, Taxpayer's sales of the several lots forming part of his rental business cannot be characterized as other than sales of non-capital assets. the sales concluded on installment basis of the subdivided lots do not deserve a different characterization for tax purposes.

This Court finds no error in the holding that the income of the Taxpayer from the sales of the lots in question should be considered as ordinary income.