CALASANZ v CIR
However, they admitted that roads and other improvements were
DOCTRINE: 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.
FACTS:
Ursula Calasanz inherited from her father an agricultural land located in Cainta,
Rizal. 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.
CIR issued an assessment against petitioner as deficiency income tax on
ordinary gain.
Petitioner filed a petition for review contesting that assessment.
CIR contends that 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."
Petitioner asserts that an heir who liquidated his inheritance cannot be said to
have engaged in the real estate business. Petitioners averred that the tract of
land subject of the controversy was sold because of their intention to effect a
liquidation.
introduced to facilitate its sale.
ISSUE:
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.
RULING:
The court held that in the course of selling the subdivided lots, petitioners are
engaged in the real estate business and accordingly, the gains from the sale of
the lots are ordinary income taxable in full.
The court ruled that even though there is no fixed formula which can determine
whether the property sold by a taxpayer was held primarily for sale in the
ordinary course of his business or it was sold as capital asset. The court found
that one strong factor that shows that the petitioners are engaged in real estate
business is the element of development.
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. 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 expanded
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.
Also a property initially classified as a capital asset may be treated as an
ordinary asset if 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.
ANTONIO TUASON, JR. vs. JOSE B. LINGAD, as CIR
Facts:
Petitioner inherited parcels of land from his mother. Among these tracts of land
is a parcel subdivided into small lots, which was leased and was sold over the
years on a 10-year annual amortization basis to their respective occupants.
In 1953 and 1954 the petitioner reported his income from the sale of the small
lots as long-term capital gains. The Collector of Internal Revenue upheld the
petitioner's treatment of his gains from the said sale of small lots. In 1963, the
CIR now reversed himself and now considered the profits from the sales of the
lot as ordinary gain. Subsequently, the BIR has advised the petitioner to pay for
his income tax deficiency.
Issue: Whether or not the properties the petitioner inherited are considered
capital assets.
Held + Ratio: Yes.
The National Internal Revenue Code (C.A. 466, as amended) defines the term
"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.
loss from the sale or exchange of all other properties of the taxpayer is a capital
gain or a capital loss.
The following circumstances show unequivocally that the petitioner was
engaged in the real estate business:
(1) the parcels of land involved have in totality a substantially large area, nearly
seven (7) hectares, big enough to be transformed into a subdivision, and in the
case at bar, the said properties are located in the heart of Metropolitan Manila;
(2) they were subdivided into small lots and then sold on installment basis (this
manner of selling residential lots is one of the basic earmarks of a real estate
business);
(3) comparatively valuable improvements were introduced in the subdivided
lots for the unmistakable purpose of not simply liquidating the estate but of
making the lots more saleable to the general public;
(4) the employment of J. Antonio Araneta, the petitioner's attorney-in-fact, for
the purpose of developing, managing, administering and selling the lots in
question indicates the existence of owner-realty broker relationship;
(5) the sales were made with frequency and continuity, and from these the
petitioner consequently received substantial income periodically;
(6) the annual sales volume of the petitioner from the said lots was
considerable; and
(7) the petitioner, by his own tax returns, was not a person who can be
indubitably adjudged as a stranger to the real estate business.
Hence, from the foregoing, the properties are considered as capital assets
which should be taxed as ordinary income.

As thus defined by law, 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
CHINABANK V CA

Topic: Capital Gains and Losses

FACTS: Chinabank made a 53% equity investment in the First CBC Capital (Asia)
Ltd, a Hong Kong subsidiary. First CBC became insolvent. With BSP approval,
Chinabank wrote off the investment in its ITR as a bad debt or as an ordinary
loss deductible from its gross income.
The BIR disallowed the deduction on the basis that the debt was not worthless.

ISSUE: WON equity investment is a capital asset?

HELD: YES. As a ruled by the SC, 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 capital loss.

Equity investment is not indebtedness in the first place but rather a

capital not an ordinary asset. Share of sock would be an ordinary asset only to a
dealer of 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 share 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.

The court further stated that assuming that the equity investment of
CBC has indeed become “worthless”, the loss sustained is a capital, not an
ordinary, loss. The rule thus is that capital loss can be deducted only from
capital gains. The capital loss sustained by CBC can only be deducted from
capital gains. The capital loss sustained by CBC can only be deducted from
capital gains if any derived by t during the same taxable year that the securities
have become “worthless”.

NOTE: The exception (where the capital loss limitation rule will not apply) – if a
bank or trust company incorporated under the laws of the Phil. A substantial
part of whose business is the receipt of deposits sells any bond, debenture,
note or certificate or other evidence of indebtedness issued by an corporation
with interest coupons or in registered form, any loss resulting from such sale
shall not be subject to the above limitations and shall not be included in
determining the applicability of such limitation to other losses.
CIR v.RUFINO Accordingly, he imposed the deficiency assessments against the private
respondents.
Petitioner: Commissioner of Internal Revenue The CTA ruled that there was a valid merger and no taxable gain should be
Respondenst: Vicente A. Rufino and Remedios S. Rufino, Ernesto D. Rufino and imposed.
Elvira B. Rufino, Rafael R. Rufino and Julieta A. Rufino, Manuel S. Galvez and
Ester R. Galvez, and Court of Tax Appeals ISSUE: Whether or not there is a taxable gain and a valid merger.
G.R. Nos. L-33665-68 February 27, 1987
HELD:
Topic: MERGER AND CONSOLIDATION The Supreme Court affirmed CTA’s decision.
One certain indication of a scheme to evade the capital gains tax is the
FACTS: subsequent dissolution of the new corporation after the transfer to it of the
The private respondents were the majority stockholders of the defunct Eastern properties of the old corporation and the liquidation of the former soon
Theatrical Co., Inc., a corporation organized in 1934, for a period of twenty-five thereafter. In this case, it is clear, in fact, that the purpose of the merger was to
years terminating on January 25, 1959. It had an original capital stock of continue the business of the Old Corporation, whose corporate life was about
P500,000.00, which was increased in 1949 to P2,000,000.00, divided into to expire, through the New Corporation to which all the assets and obligations
200,000 shares at P10.00 per share, and was organized to engage in the of the former had been transferred.
business of operating theaters, opera houses, places of amusement and other It is well established that where stocks for stocks were exchanged, and
related business enterprises, more particularly the Lyric and Capitol Theaters in distributed to the stockholders of the corporations, parties to the merger or
Manila. The President of this corporation (hereinafter referred to as the Old consolidation, pursuant to a plan of reorganization, such exchange is exempt
Corporation) during the year in question was Ernesto D. Rufino. from capital gains tax. The exemption from the tax of the gain derived from
The new Corporation also in the name of Eastern Theatrical Co Inc., which was exchanges of stock solely for stock of another corporation resulting from
organized on 1958 has an authorized capital stock of P200,000.00, each share corporate mergers or consolidations under the above provisions, as amended,
having a par value of P10.00. This corporation is engaged in the same kind of was intended to encourage corporations in pooling, combining or expanding
business as the Old Corporation. The General-Manager of this corporation at their resources conducive to the economic development of the country.
the time was Vicente A. Rufino.
It was agreed by the board that Old Corporation and New Corporation should
merge to continue the exhibition of moving pictures at the Lyric and Capitol
Theaters even after the expiration of the corporate existence of the old
corporation. Hence Deed of Assignment providing for the conveyance and
transfer of all the business, property, assets and goodwill 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 except that no new and unissued shares
would be issued to the shareholders of the Old Corporation.
As agreed, and in exchange for the properties, and other assets of the Old
Corporation, the New Corporation issued to the stockholders of the former
stocks in the New Corporation equal to the stocks each one held in the Old
Corporation.
Consequently, Bureau of Internal Revenue examined later, resulting in the
petitioner declaring that the merger of the aforesaid corporations 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.
CIR VS. FILINVEST DEVELOPMENT CORPORATION (2011)
Author: Plan
Topic: Determination of Gain or Loss from Transfer of Shares of Stocks
Doctrine: The requisites for the non-recognition of gain or loss under the
foregoing provision are as follows: (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.
Facts:
- Filinvest Development Corporation (FDC), a holding company owns
80% of the outstanding shares of Filinvest Alabang, Inc. (FAI), and
67.42% of the outstanding shares of Filinvest Land, Inc. (FLI).
- In 1996, FDC and FAI entered into a Deed of Exchange with FLI whereby
the former both transferred in favor of the latter parcels of land. Said
parcels which were intended to facilitate development of medium-rise
residential and commercial buildings. In exchange, shares of stock of
FLI were issued to FDC and FAI.
- As a result of the exchange, FLI’s ownership structure was changed:
FLI’s ownership Before After
FDC 67.42 61.03
FAI 0 9.96
Others 32.58 29.01
100 100
- In 2000, FDC and FAI received a Formal Notice of Demand from BIR to
pay deficiency taxes were assessed on the taxable gain supposedly
realized by FDC from the Deed of Exchange.
- FDC and FAI’s contention: No taxable gain should have been assessed
from the subject Deed of Exchange since FDC and FAI collectively
gained further control of FLI as a consequence of the exchange.
- CIR contention: the transfer of property in question should not be
considered tax free since, with the resultant diminution of its shares in
FLI, FDC did not gain further control of said corporation. taxable gain
should be recognized for the exchange considering that FDC's
controlling interest in FLI was actually decreased from 67.42% to
61.03%. Likewise, Without owning a share from FLI's initially, the
exchange resulted a control of 9.96%
Issue: W/N the transfer of shares of stock from the exchange is considered a
taxable gain or loss. – NO.
Ruling+Ratio: NO
- Section 34 (c) (2) of the 1993 NIRC provides that gain or loss will not
be recognized in case the exchange of property for stocks results in
the control of the transferee by the transferor, alone or with other
transferors not exceeding four persons.
- The new shares issued to FAI representing 9.96% control together with
FDC's 61.03% and clearly add up to 3,000,452,000 shares or 70.99% of
FLI's.
- Since the term "control" is clearly defined as "ownership of stocks in a
corporation possessing at least 51% of the total voting power of
classes of stocks entitled to one vote", the exchange of property for
stocks between FDC FAI and FLI clearly qualify as a tax-free transaction
under the same provision.
- The requisites for the non-recognition of gain or loss under the
foregoing provision are as follows: (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, the BIR had in fact acknowledged the concurrence of the
foregoing requisites in the Deed of Exchange the former by issuing BIR
Ruling No. S-34-046-97.54 With the BIR's reiteration of said ruling upon
the request for clarification filed by FLI, there is also no dispute that
said transferee and transferors subsequently complied with the
requirements provided for the non-recognition of gain or loss from the
exchange of property for tax,
Disposition: Petition is DENIED.
Other Notes:
- As apprised in FLI's request for clarification about the change of
percentage of ownership of its outstanding capital stock, the BIR
opined as follows:
Please be informed that regardless of the foregoing, the transferors,
Filinvest Development Corp. and Filinvest Alabang, Inc. still gained
control of Filinvest Land, Inc. The term 'control' shall mean ownership
of stocks in a corporation by possessing at least 51% of the total voting
power of all classes of stocks entitled to vote. Control is determined by
the amount of stocks received, i.e., total subscribed, whether for
property or for services by the transferor or transferors. In determining
the 51% stock ownership, only those persons who transferred property
for stocks in the same transaction may be counted up to the maximum
of five (BIR Ruling No. 547-93 dated December 29, 1993).
- At any rate, it also appears that the supposed reduction of FDC's shares
in FLI posited by the CIR is more apparent than real. As the uncontested
owner of 80% of the outstanding shares of FAI, it cannot be gainsaid
that FDC ideally controls the same percentage of the 420,877,000
shares issued to its said co-transferor which, by itself, represents
7.968% of the outstanding shares of FLI. Considered alongside FDC's
61.03% control of FLI as a consequence of the 29 November 1996 Deed
of Transfer, said 7.968% add up to an aggregate of 68.998% of said
transferee corporation's outstanding shares of stock which is evidently
still greater than the 67.42% FDC initially held prior to the exchange.
This much was admitted by the parties in the 14 February 2001
Stipulation of Facts, Documents and Issues they submitted to the
CTA. Inasmuch as the combined ownership of FDC and FAI of FLI's
outstanding capital stock adds up to a total of 70.99%, it stands to
reason that neither of said transferors can be held liable for deficiency
income taxes the CIR assessed on the supposed gain which resulted
from the subject transfer.

- (Same case nung nasa topic under Special Rules. Ibang issue lang.)
GREGORY V. HELVERING
Petitioner: Evelyn Gregory
Respondent: Guy Helvering, Commissioner of Internal Revenue
Author: Daniela
Topic: Determination of Gain or Loss from Sale or Transfer of Property; Business
Purpose
Doctrine: Section 112 of the Revenue Act of 1928 (g) Distribution of Stock on
Reorganization. If there is distributed, in pursuance of a plan of reorganization,
to a shareholder in a corporation a party to the reorganization, stock or
securities in such corporation or in another corporation a party to the
reorganization, without the surrender by such shareholder of stock or securities
in such a corporation, no gain to the distribute from the receipt of such stock of
securities shall be recognized....
For business reorganization to affect tax liability, the reorganization
must have economic substance, not be merely an attempt to reduce tax.
However, the legal right of a taxpayer to decrease the amount of what
otherwise would be his taxes, or altogether avoid them, by means which the
law permits, cannot be doubted.
Facts:
 Evelyn Gregory was the owner of all stock of United Mortgage
Corporation. The corporation held among its assets 1,000 Shares of the
Monitor Securities Corporation.
 For the purpose of procuring a transfer of these shares to herself in
order to sell them for individual profit and diminish the amount of
income tax which would result from direct transfer by way of dividend.
 She sought reorganization under Section 112 (g) of Revenue Act 1928
and organized a company called Averill Corporation under the laws of
Delaware.
 Three days after, the United Mortgage Corporation transferred the
1,000 shares to Averill, for which all the shares of the Averill were
issued to Gregory.
 6 days after it was organized Averill was dissolved and liquidated by
distributing its entire asset to Gregory. No other business was
transacted and immediately sold the shares for $133,333.33, she
returned for taxation as capital net gain the sum of $76,007.88 based
upon an apportioned cost of $57, 325.45.
 The CIR held Gregory liable for tax as though the United corporation
had paid her a dividend consisting of the amount realized from the sale
of the share and that the reorganization was attempted without
substance and must be disregarded.
 Board of Tax Appeals rejected the commissioner’s view. The Circuit
Court of Appeals sustained the commissioner holding that there had
been no reorganization within the meaning of the statute.
Issue: a. Whether or not the reorganization was valid and in accord with Section
112 (g) of the Revenue Act of 1928.
Ruling + Ratio: No.
 Section 112 of the Revenue Act of 1928 (g) Distribution of Stock on
Reorganization. If there is distributed, in pursuance of a plan of
reorganization, to a shareholder in a corporation a party to the
reorganization, stock or securities in such corporation or in another
corporation a party to the reorganization, without the surrender by
such shareholder of stock or securities in such a corporation, no gain to
the distribute from the receipt of such stock of securities shall be
recognized...
 Definition of Reorganization means (B) a transfer by a corporation of all
or a part of its assets to another corporation if immediately after the
transfer the transferor or its stockholders or both are in control of the
corporation to which the assets are transferred.
 If reorganization in reality was effected within the meaning of
Subsection (B), the ulterior purpose mentioned will be disregarded. The
legal right of a taxpayer to decrease the amount of what otherwise
would be his taxes, or altogether avoid them, by means which the law
permits cannot be doubted.
 In this case, Gregory’s purpose was not to create a business but to
avoid tax liability and to transfer a parcel of corporate share to gain
profit. Section 112 (g), deals with the subject of gain or loss resulting
from the sale or exchange of property. Such gain or loss is to be
recognized in computing the tax, except as provided in that section.
Subdivision (B) speaks of a transfer of assets by one corporation to
another, a transfer made in pursuance of a plan of reorganization of a
corporate business and not a transfer of assets by one corporation to
another in pursuance of a plan having no relation to the business of
 either. Therefore, the reorganization was not in accord with Sec 112
(g).
Other Notes:
 Two legal doctrines: First, the business legal doctrine is essentially
that if a transaction has no substantial business purpose other than
avoidance or reduction of tax, the will not regard the transaction.
Second, the doctrine of substance over form is essentially for tax
purposes, a taxpayer is bound by the economic substance of a
transaction, if it varies from its legal form.
 Economic substance is a doctrine in the tax law of the United
States under which a transaction must have both a substantial
purpose aside from reduction of tax liability and an economic
effect aside from the tax effect in order to be considered valid.