CTA Case No. 2893 (Decision)

m. iutE��J~~.fi'<' 7 Tm~ r m u r.-~H'"'��~ cour~T o;:;- 1'AJ{ .t~.f�'f.F :.t~ m:~:~4t;.m..r c~n� T A10DES'l'O T. FLOH.ESv as Administrator of the Testate ~state of the late Mary McDon~ld Bachrach, Petit ion(-:.Jr ; -� versus - C.T.A. CASE NO. 2893 EFREN I. PLANA, in his capacity as Acting Commisaioner of Internal Revenue, Eespondent" X- - - - - - - - - - - - - - X D E C' T s I 0 N Under Section 34 {a) (1) .of the National IntE:rna.l Revenue Code, ~eal property used in trade or busi- ness of the taxpayer and/or which is of a character subject to the allowance for depreciation is not considered a capital asset. Contending that a property consisting of three parcels of land and imprc.�;emcnts thereon which the Test~=. te Estate of th l ate Mary McDonald Bachrach sold in 1970 does not con~titutc a capital asset because prior to the sale, the said property had been leas~d to tenants from wbicb 1:ent.al income was der::i.ved and fl:OF\ which yearly depreciation ~as c~aimed as deduction, res- 260

-- DECE;}C~J CTA CASE NO. 2893 -~ 2 deficiency i ncome tax against petitioner Vodesto T. Flores, as ~dmi~isLrator of the Testate Estate of the late Mary McDonald Bachrach, for the yea: 1974 the amount of ~ll3t5B2.17, sompuced as follows: Net: income per return- - -� �- - ~- -� -~ ~1A9,6c10.17 Add: Undeclared income: Profit on sa l e of land & bu i 1d ing 3 --� ~� - -� _Ml-~~.15. ~, E::J.. Net income per investigation ~228 , 1;5.76 rs Less: Personal exemption - - - - - - 1,800.00 Arr1ot.mt subject t.o ta}r. "- - - �� - -~��:l-Tl�58�~69-:,.-L31.':71.5:2-:--..---0n..�0-- Tax due tbc~reon - �- -~ ~- - -� - - assessed - - -P-~6-9-80~,-8-3-10~1-1-..�00-00- ____ Less: - - Ra 1 Amount already - - anc e Add: 14% i~ t . fr. 4-16-75 to 1-31-77- 22..77 ;..,..__. 1.17. ~- TOTAL AMOUNT DUE & COLLECTIBLE Fe t i t ione r now sc::? l~ ~;:. Lhe :: 0;v1ew of the de f i- ciency incoille tax assessment. The facts are not in dispute, the parties havi.ng entered into a stipulation of facts as follov,rs: 1. That pet i tio ner is the a dminis- t r ator of the :estate of the la t e r<la:r.:y McDonald Bachrach duly appoin ted and qualified as such in Special Proceedings No. 4?942 of the Court of First Instance of !-1anila; while Honorable :c;;L:en J. I'lo.1~a. is the duly a.rFcJint .:.d and q,_;a.l:i.fi.ed A~ting Commissioner of Internal Revenue; 2. ~e hat thE! deceased Hary HcDonaJ.d re:::..;i(,r .:i � Jl. 2..:1 ua--il h--H� dent\�. : a,~h:.~<.:C.I : �:. t-\.: .�~s,t�iSt-~.' J. 9b0 r 1 "Ja V5.ll(j ;:�~1t l'LCJ .. SC::;;�l~~.:.:.~..!nt~� ')-'w " 1

.. DECISIOi CTA CASE NO. 2893 - 3- her propertie2, three (3) parce_s of .1.. o'<.'n d- a1c~, J0.mf) .~. (-''v'"''Y .-C�t1e .. cs, '") -'. ( b...'.u ,.��'_a'1 _l n g �C�'' ) , which were then under constructio~ and completed only in 1962; 3. That the aforementioned properti~'.;s were leased to Rural Transit, Inc. from J.962 to 1970, and deprec i ation expenses we~e claimed fr0m year to year in the income tax retun s filed fer the Estate of the late Mary McDonald Bachrach; 4. T~at in September, 1970, the aforementioned properties were sold ,y the Estate of Mary McDonald Bachrach through its Administrator to Kalaya.an Deve l opment Corporation on installment basis, the said esta t e r eceiving the final payment of P 500, 00 0 .0 0 i n 197 4 ~ 5. That the profits derived from the aforestated sale were reported by the estate as capital g�ins in th3 income tax returns covering the period in which they were received althJugh depreciation ex- penses were claimed; 6. That on Jnnuary 20r 1975 ~ the Court of Fi~st Instance of Manila in Special Proceedings No. 43942 issued an Order to the effect that the liability of Bachrach Transportab.on Co., I nc., owner 2nd operator of Rural Transit, Inc., to the Social Security System for back premium ccn.tr ibut.ions may be enforced against the Estate of the late Mary McDonald Bachrach, the decPased being the majority controlling stockhol der of the said Bachrach Trancportation Co., Inc. A certified true copy of said Order dated Ja~uary 20, 1975, is hereto attached and made an integral part of this Stipu- lation of f;::,cts as .l\nnex nl\ 11 , 7. ~~at as a result of an investi- ga t.ion Y here in r csponden t. r on J�anuary 31; 19 77 , i-sued and sent a letter of demand tog.eth0r with �. scessmen t Not ice No.

DEC IS lON -~ CTA CASE NO. 2893 AR-34-1-07013965-74/76 to Messrs . Flores, Ocampo, Dizon & Domingo, counsel for the Estate of Mary McDonald Bachrach 1 demanding payment of the sum of P113,582.17 as deficiency income tax for 1974 of the said estate, inclusive of 14% interert �rom April 16~ 1975 to ,J anuary 31, 1977, respondent Com;nissionet: of Internal Revenue l~vi~g considered tha properties sold as a~ ordinary asset.pur- 3,_, ( , ) ( c,:::.ct i to n11 ,~.,ul ;:,_.l.,��l �lIo-..� - ~:) ._. ......... - � ..... " c. . _l,. 'J' (.);.t"- ;""~" .!.��;�.,:.:.:.. 'I'"a'. X C~ o d e. � "W : 8. That the Estate f Mary McDonald Bachrach through its counsel in its letter dated M~Lch 22, 1977 , received by the Bureau on March 23, 1977, protested t he afo resaid tax assessment; 9. That on August 1, 1977, a copy of the Warrant of Levy on Real Property to enforce collection of the aforestated amount of Pll3,582.17 plus increments thereto incident to delinquency was served upon the Estate through its counse l Messrs. Flores, Ocampo, Dizon and Domingo; 10. 'l' .1at this Stipulation of Facts .is without prejudice to the parties' respec- tive cla:ms and defenses and that the parties further reserve their rights to present additional evidence to ~ubstantiate the i r contentions. The only additional cviden �e presented by petitioner i;;; Exhibit "A" (p. 61 1 CTA record'~>),_ which is the rclurn of previously untaxed income and/c.r wGaLth ,>.t.: individuals dated February 28, 1975 fiJcd Ly ''. ,:: .1dm..i.nistr~tor of the E~:;tate of Nary dcDoL~l1�.1 Dachrach with the Bureau of Inter11al I ev(~nue under Presidential Uccrcs No. 631. After the p:~.rties have filed theiJ.: reF.pective memorcuidum,. this c&se w~s submitted f~r d~cision. 2()3

DECI!::~IOFi CTA CASE NO. 2893 �-� 5 ~ As correctly stated by petitioner, the crux of the controversy lit3;::; on whethC;;;J: the properLy sold to the Kalayaan Development Corporation by the Estate of Mary McDonald Bachrach is an ordinary asset or a capital asset pursuant to Section 34(a) (1) of the National I~ternal Revenue Codo. If i~ is a capital asset, the gain derived from the transaction should be treated as a capital gain, and considering that the property had been held by the Estate for more than twelve months, only 50~ of the gain should be taken into account in com!_)uting the net capital gain of the Estate for the year 1974, in acco~dance with the law then in force. On the other hand, if the property sold is considered an ordinary asset, the gain derived therefrom is an ordinary gain, and ordinary gains are taxable in full. Petitioner's submission that since the improve- ments, consisting of buildings, made on the three parcels of land left by the deceased Mary McDonald Bachrach were only completed, although started before she died, after her death, there was no business to speak about but only a probate proceedi1 g for th~ se t t.l(2men t of the Est a tc which involves nothing more than the payr9nt o~ itq indebtedDess and the distLi- bution ui" tiK: remaining Cl.""'Sets ,_,mong tiH~ .Legab~c;::s 2 G�l

DECISION -� CTA CASE NO. 2893 -� 6 - under the wilJ. p henc;e u there! is no pr-operty used in trade or busincssr is positively without b2~is. Under Section 56 of the National Internal Revenue Code, the estate of a deceased person which is subject of judicial testalen-ary or intestate pro- ceeding is liable to income tax in the same manner and to the same extent as an individu~l. It is cJvious from the facts of the ca~e~ as stipulated by the parties , that the deceased Ma~y McDonald Bachrach left among her properties three parcels of l and and buildings under construction intended for business, as in fact , the said properties, after the construction of the buildings, we~e rerted to the Rur~l Transit, I nc., f om 1962 to 1970; and defreciation expenses were claimed from year to year ln the income t~.x. ;:etur.Tlf3 filed for the Estate of the d2ceased, until such properties were sold by the Estate in Septembc1: 19'70, t.l:rough its adr~inistrator, to the Kalayaan Development Corporation on installment basis, the said estate receiving the final payment of ~500,000.00 iD 1974. Since the administrator of the Estate of the late Mary McDonald Bachrach, the settlement of which i.s :he object of tcst2n2ntary proceeding is requi~ed to file an annual return (Sec. 209, Rcven~e Pegu- 2G5

C','1;l\. c:l\.SE; .. "" .7 .. lations No. 2) and pay ~nco~~ tax ~ue ~he~eon (Sec. 212, Revenue Regulat io ns No . 2) in the same manner an~ to the ~me extent es an Jndividu~l taxpayer, it must be axiomaLic, therefore, th2t saction, OJSLncss or income as are impos .d by law upon individu3ls engaged in the same business or transa.ction. ion 3 4 ( .,. ) (1) �1.he con troLL in(] t�1� +� .�.i.....,.., c-.:J -.l..-~'-�.�-�..i\..'"c'", ;:1 c t- ~.).-c;;.;':..~......... __ . . . ' . �:.:A of the National Internal Revertue Code, which textually reads: "SEC. 34~ Capital gains an d l osses.- (a) Definitio~o.- As used in this Title - (1) Capital ''-"'~.;ets.�~'l'hc ter.:m "capita::.. h"'�i,�-:t "'�~s"'-�t�~" 0 ta~�.�.>..tr�_'.;..:,.;_'_>_re��.-v~ M .,.,. ,;. .., """" -.;- ;~ !�'~ ~8~ "'..1""~'� ,tt:").l-"C'~.~J'!".-"'" .l.,,"f"-'-.Xu bv -��ha ~ ~- ' traJe �. �'� !..... "' \;.... {whether or not conn0cted with his or business) , but does not include stack 1�,.... t�l�c-- otn' "'' . -'" tJ..--C-h,--"<!~o� of"�'- �.1. +<�-'-;':-,�v�,D_ -~,�'..J781-" 01-.. "'-'- n_;:��-�c-\."..�',P.. C ', . .�t:'J� Jl.. of a 1dnd v!lu.cb. '\-�JOuld p.roperly be i.ncL:r.ied in thG invent:()ry of the t-D~~payG~r if on hand at the c:tc~r::e of !.:he ta:<abJ.e year., or prope�ty held by the taxpayet primarily for sale to custorncrs in the crdin.ry course of his Lr2dc o~ business, o~ pro- perty1 used in the trc.tdc cr Lur,;:i.nc:s:;, of a ch.:u:actE:r wili.-::.1: i;-;;. subjc;ct to the aLLov:a:.K(; for depreciation provided in subsectio~ (f) of section thirty; or real prop2rty used in the tra/ic.' OJ: })UfJiLf~SG of tl.41e i.:t;l.:.:-:pa:l~~[ l n applicable seems clear beyond doubt, that under 2GG

CTA CASS NO. 2893 which is of D character which is subject to th~ allm�;,~mce fot- depr.:cciat:ion doe~;; not con.:.~titute a capit~l asset. The gain or loss from the sale or exchange thereof should be t:eated as ordinary income or loss. Accordirgly, if the three parcels of land and buildings which were sold by the Esta Le of Mary McDon~ld Dachrach in Septe~ber 1 70 wers used by the Es~ate in trade or business , the yain derivc:d from t.he sale orc"a.J,ar y g.:u. n , hence , fu l ~y t~xable. The point then to resolv0 is whether the leasing of the three parcsls of land ;:md the i mprovements thereon to the Rt.H:-al 'I'ransi t, Inc., from 1962 to 1970 and from vi'll:i.cL depreciation a l lowance was claimed from year to year in the income tax returns filed by the Estate were used in t he trade or business of the latter. Under the law th~n in force - Section l94(s) of the National Internal Revenue Code as amend~d by Republic Act No. 2065, Jun~ 22, 1957 - any person engaged in the business of buying, selling, ex- and holdin9 himself out os a lull or part-time deal0c in real estate or owner of rental property or 2G7

DECISION -� CTA CASE NO. 2893 �' - estate de2ler. And any person shall be c0nsidered as engaged in businc~s ns a rual estate dcal~r by the mere fact that he is the owner or sublessor of property rented or offered to ron. for an aggregate amount of P4,000.00 or rncre a y(c:ar. Here, in the case at bar, it is adn.itted , ard clearly borne by the records, that the deceased Mary McD�._.nald Baehr ach left amonq her pr:oper tiN:>, three pa~cels of land located in Caloocan City consisting of 8fl81 square meters with a1 e state inventory value of :1?439,955 . 00, and improvements which were th~n unde r construction at the time of her death sometime in August 1960 but comtleted in 1962. The improvements consisted of transportation terminal buildingsr shop and maintenance buildings and other bu:lding accessories with a constluction cost of r472,360.0l, whi~h by their ve~y naturer were constructed aDd intended, and actually and purposely, for busi ess and profit. (p. 2, BIR records. ) These properties were continuously leased which .::enta.l income was dcr: ived by the estate and from which yearly depreciation allowance was claimed prop2rties wer~ 2old by tne Estat~ of Mary McDo~ald 2G8

DI::C IS l Q;:\1 ..v CTA CASE NO. 2893 ... 10 - Bachrach, t' rough its admi~jstrator, to the Kalayaan Develorment Corporation on installment basis, the said GState receiving the final payment of PSOO,OOO.OO in 1974. Since the land and buildings which the estate sold in 1914 had been leased to the Kalayaan Develop- ment Corporation f~om which rental income was derived and from which yecrly depreciation allowance was claimed as deduction, it is self-evident that they cannot be considered ac capital asset . Under Sec~ion 3/. (a ) (1) .of the lational Internal �HeverlUe Code,, .�i!-I~.~~ real property used in trade or business of the tax- payer and/or which 1s of a character ~ubject to depreciation docs not constitute a capital asset. The law is. c._ear and specific. It merely calls for: application as worded. Where the provision of the l.:nv is clear and un.ambi.<;juous, GO that �.hcr:e 1.s no occasion for the courl' s seeking legisl.:1tivc intc~nt, the law must be taken as it is, devoid of judicial addition or subtraction . (Acting Commissioner of Cus (:oms 'If.;. t-'li:=miln Elec Lr ic Compan:!, L-�23623 1 ,June 30, 1977, 77 SCRA 47:; Insul~r L0mbcr CompDny vs. Co~rt of Tax Appe~ls & Commission~r of Internal Revenue 1 L-31057 & L~31137f May ~9, 1981.) 2G9

DECISION ... CTA CASE NO, 2893 - ll - The mere fact t~at Mary McDonald Bachrach resided abroad until her death, and the business as real estate dealer w~s engaged in by the Estate thruugh the adminiotrator is of ro moment because, as stated L"rlier, pursuant to Section 56 of the National Intern�l Revenue Code, the estate cf a deceased person ir subject to income tax in the same mann~r and to the same extent as an individual. Where a piece of real property was never occupi_d by the taxpayer as a residence but was primarily held for rent, it is ~n ordinary asset as it was used in trade or busi- ness, and thercfoJ~c, the gain derived from t).le sc:.1le of saic prop0rty is taxable in full. (Collector of Internal Revenue vs. Pedro B. Bautista & Dativa Cor.:rales rl'a! I L-12250 & IJ-1225C: I May 27, 1959' 105 Phil. 13 26; Gut icr r e z vs. Comm,i.ss ioner of :J~ter nal Revenue, L-19537, May 20, 19~5, ld SCRA 33.) To the extent that the decision of the Commis~:;io11Cr of In~ernal Revenue adheres literally to the appli- cable legal provision, it cannot therefore be assailed as err8neous. Some stress was placed by petitioner upon the order dated January 20, 1975 of the Court of Jirst Instance of Manila in Special Proceedings No. 43942 to t.e effect that the liabiliLy of the Bachrach Transportation Co., Inc., owner and operatnr of the 27 0

.. DECISION -� CTA CASE NO. 2893 -� 12 ... Rural Transit, Inc., to the Social Secu.ri.ty System for back premium contributions may be enforced against the Estate of the late Mary McDonald Bachrach, the deceased bei.ng the majority controlling stockholder of the said Bachrach Trans- portation Co., Inc., From this petitioner would want to infer ~nd imply that the deceased Mary McDonald Bachrach and the Bachrach Transportation Co., Inc., o~erating the Rural Transit, Inc., are one and the same so that no such rental income was actually received by the Estate. The fallacy of petitioner's argument is its assumption that the order of the Court of First Instance looked beyond the corporate form and ignored the separate entity of the corporations. Whcttever the� dialectics employed, the Court of First Instance did net trc~t as identical, one and the same cr merged the Estate of the deceased Mary McDonald Bachrach, the Bachrach Transportation Co., Inc., and tho Rural Transit, Inc. The basis of the ordc:.:r th<:::r: the 1 iabiL. ty oJ: tlB Bach:.:- ach 'I'r a.nspor t~ ation Co., Inc.v to the Soci~l SecuriLy System for back premium contributions may be cnfo~ced a3ainE~ the Estate of th~ d~ceased Mary McDonald Bachrach ia rnnrely ~he majority ownership of the 27 1

.. DECIS.UU ... CTA C~SE NO. 2803 of the i~aginatlon did the Court af First Insta~cc ruled, or ever imolied, that the deceased Mary McDon~ld Bachrach and the Rural ~~ansit, Inc.r a!e one ~nd the same, so that they sho~ld be treated as identical for purposes of taxation. To sav the(8- :fore 11 that. :�>uch rental income 'vlr.U: n.ot ac-cually rc~ce:ived by the esta�te" (p. 68v CTl\ records) is to ignore the ba~ic principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations. bare statement of petitioner for the first time in his memorandum 11 that such rental income was not actually received by the e2 tab:;" una-:-~companied by ad.equ.s. tc ev idcnce, \\�hen appealed from L.hat "rental income ':.ras dc.c i.ved" from the property leased (p. 1~, CTA records), has no weight with the Court. Not much need be said on petitioner's allc- gation that responde~t ComrniGsioner could no longer administrator h~d alreadj avail?d of the tax

DECISION CTA CASE NO. 289: - 14 .. ( p rc ) :cecords shew C'I'l� - � Ovp Jv .r..,l~:;.cc... ';.r~;~;,~:,� , oi'o'tt~.J..~Ll..-t.n;: LL-bJ.C~: that petitioner has filed a ret~rn of previously unt~xcd income and/or wealth undo~ Presidential Deere~ No . 631, the disclosure, as explicitly stated therein, refers only to previously untaxed income and in the ~mount of only PB33 . 00. (Exh . "A." f p ,. 6l r C'.L'A rccordG. ) The assessment in question pertains to the tax liability of pstil:ioner for: the y_c,~ 19 7 4 and the amount involved is ~90 1 611.00, ex- e lus i ve of deficiency interest. To quote Secti on 1 of Presidential Decree No . 6 31: " Section l. !'. t~D' amnesty is hereby granted to any person, n atural o.': juridical .� who h~s not availed of previous amncs~y decrees an untaxed income and/or wealth 1 or having availed thcreof 8 did not made a full and complete disclosure of his untaxed income and/or Health, or t�Jho La :i.lsd to declare for taxation purposes his true a nd correct income or receipts earned or received in 1973, which were taxable unde[ tbe National Internal Revenue Codc 1 ... if such oerson voluntarily rend-ra a ~:�<�:.fij r11 o~ ..:11_:h t~l"f t�xc�aw i.6s�o~~----~~15~IZ9i: ~~l!_.fg r :h ~ �;}_....E:Il<:l..J2�.i l?E.....Y.:2.~~.f::..�._,?~ ti. 0_J~�.Y. an a moJ:!.!l!=- _eg u iva 1 en ~ to '�lt e r:_~y__j_:;~g ~b ) . 12.�.!:-�.~-~:!J::l~~2._2..f.._i�i_~.,S:,!]__i:.1!.LS_~.~il_.!:E~~':S:.~~c ...~~l"lcJlS:.E -\1�/-C-:-l,l.-t-h~. a (Emnhasis SUDUlicd\ I:: .... .... ! rendering of a return of untaxed income and/or 27 3

.. DEC:I~.;ION ... CTA CASE NO. ~893 - lS ~ 6:1 has no effect on the deficie~cv income tax asf.1ecsrnent for t.i1.e ycdr 1974 aga.inst tb.e s~IHe cBtate i~~olved in this proceeding. Nor will the atgument that the Commissioner of Internal Revenue is estopped from lreating the profits derived from the sale of the property as ordinary gains considering that the same have been successively declared in the Estate's annual income tax returns for the last four or five years as capital gains and the same had never been qucs- tioncd by respondent (pp. 68-69, CTA records), carry the day for petitioner. As aptly stated by .Lesponaent, \:he Commisr~ ionel~ of Internal r~evenu.E! is not prevE:r>.tec1 �rom rectifying the r~n::or and a well-settled doctrine that the Gove:nment is ~at estopped by the mistake or error on the part of its agents. (Pineda v~. Court of Pirst Instance of ~ayabas, 52 Phil. 803; Philippine Long Distance Telephone Company vs. Collector of Internal Revenue, 90 Phil. 676.) W lock in retrospect at the philosophy bc.?.hind the Government's C'Xcepti.on f~:om the opc,raticm of the principle of estoppel by ~uoting fro~ t~c

.. DECISICF:J -� CTA CASE NO. 2893 Consolidated Mining & Development Co~poration vs. Commissioner of Internal Revenue, L-26911 and Commissione~ of Internal Revenue vs. Atlas Con- solidated Mining & Development Corporation and Court of Tax Apveals, L-26924, January 27, 1981: "As held in dw case of 7era vs. Fernandez, G.R. No. L-31364 1 March 20~ 1979, 89 SCRA 199, this Court emphati- cally said that taxes arc the lifeblood of the Government. and their prompt and certain availability are imperious n~ed. Upon taxation depends the Government 1 s ability to serve the people for whose bencf:i..t taxes a):e collected. To safe��� guard such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment. to the people, in the same manner as private persons may be made to suffer individually on account of his own negligence, the presumption being that they take good care of their personal affair. This should not hold true to government officials with respect to matters not of their own personal con- cern . This is the philosophy behind the govc.r nmen. i:. 1 s except ion, .::ts a general rule, from the operation of the principle of estoppel. :� The net result 1s that the judgment undc~ review must have to be r;u;..;tained. 1\ccordingly, petitioner Modesto T. Flores, ~s administrator of the Testate E::;lat.e of tk~ J.:.lLe ;v)c.u:y I>lcDonald Bachrach* is hereby ordered ~.pay to ~espondent Commissioner of I nte rnal Hevcnuc tb.:! sum of

DECISION ~- CTA CASE NO. 2893 per annum from January 31, 1977 up tc Jan~ary 31 5 c�ec' r::l'e) l ~�. U"Q' , 1'n~ a-'-.'........,,.~. o�f...'. �-1-�r-"4n.r'-''(":-'; wf..!~.� -lw1i...�, ...:;: o f . .. th.r.. .:. :-.. L 1�.n..._,..!,, .J- \ National Internal Revenue Code, as amended. \�HIEIU::FOI\E, c.h'::: decision appeuled from 1s he~eby affirmed at petitioner 1 s costs. SO ORDEHED. Quezo~ City, Metro Manila, June 19, 1981. ctiA~MAAaN0TtEi.;'lr~;~;)Ef/R;Y(_/1 Presiding Judge ~~~~-~ -r;ssoc ia te Judge