iutE··J~~.fi'<' m.7 Tm~ rmu 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.of the National IntE:rna.l Revenue Code, ~eal property used in trade or busi- ness of the TAXpayer and 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

iutE··J~~.fi'<' m.7 Tm~ rmu 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

DECISION ~

CTA CASE NO, 2893

deficiency income tax against petitioner Modesto

T. Flores, as administrator of the Testate Estate

of the late Mary McDonald Bachrach, for the year

1974 the amount of €113,582.17, computed as

follows:

AR~34-1-07013965-74/76

Net income per return - - ~ = = ~ = — B149,640.17

Add: Undeclared income:

Profit on sale of land &

buildings ee wee ee = 138,535.59

Net income per investigation - - - ~ 3228,175.76

Less: Personal exemption - = =~ = — =— 1,800.00

Amount subject to tax = = = = = — B06, Sion /o

Tax due thereon ~~ ew ee = = B159,112.00

Less: Amount already assessed =~ - - = 68,301.00

Balance - em ee BP 90,811.00

Add: 14% int. fr. 4-16+75 to 1-31-77- 22,771.17

TOTAL AMOUNT DUE & COLLECTIBLE = ~ - BL13,582.-17

Tae SS Sie Sew Sem See Se See Se Ses

Petitioner now seeks the review of the defi-

ciency income tax assessment.

The facts are not in dispute, the parties

having entered into a stipulation of facts as

follows:

1. That petitioner is the adminis-

trator of the Estate of the late Mary

McDonald Bachrach duly appointed and

qualified as such in Special Proceedings

No. 432942 of the Court of First Instance

of Manila; while Honorable Efren I. Plana

is the duly appointed and qualified

Acting Commissioner of Internal Revenue;

2. That the deceased Mary McDonald

Bachrach resioed «broad until her death

sometime .1 August, 1960, leaving amcng

261

. .

DECISIOi

CTA CASE NO. 2893

-

3 -

her propertie2, three (3) parce_s of

1 '<' d-

~

0

) ~ (' '"'YC

'") -'.

( b' ,• '

'1 l g C' )

..... o.n

a1c, J.mf .. -'v'.-•t1e .. cs,

.... u .• _a_n ··' ,

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 P500, 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

,January 31, 1977, respondent Com;nissionet:

of Internal Revenue l~vi~g considered tha

properties sold as a~ ordinary asset.pur-

~u;:,l·· ·I-

to c,:::.ct i n11 3,_, (,) ( l 'J

();"

;~ ! ···,:::. 'I'"' X Code. ·

,.,l

_..,

l lo..·

-

~:) ._. ......... - · .....

"

c.

. _,. '

. .t-

""" .. ;. ...

a.

~

"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 L y ''. ,::

.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

DECISION = |

CTA CASE NO. 2893

lations No. 2) and pay income tax due thereon

(Sec. 212, Revenue Regulations No. 2) in the

same manner and to the same extent as an individual

taxpayer, it must be axiomatic, therefore, that

the Estate should pay such taxes upon its tran~_

saction, es or income as are imposed by

law upon individuals engaged in the same business

or transaction.

The controlling statute is Section 34(a) (1) |

of the National Internal Revenue Code, which

textually reads:

"SEC. 34. Capital gains and losses.- |

(a) Definitions.~ As used in this Title -.

(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 pro-

perty, 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."

There is no dispute, and the legal provision

applicable seems clear beyond doubt, that under

Section 34(a)(1) of the Revenue Code, all property

used in trade or business of toc taxpayer and/or

266

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

" .

.

orcaJ,ar y g.:un ,

hence ,

fu l ~y t~xable.

The point then to resolv0 is

whethe r 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 estate

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