Delimitación del área de estudio preliminar

Capital Asset vs. Ordinary Asset (2003)

Distinguish a "capital asset" from an "ordinary asset".

SUGGESTED ANSWER:

(a) The term "capital asset" regards all properties not specifically excluded in the statutory definition of capital assets, the profits or loss on the sale or the exchange of which are treated as capital gains or capital losses. Conversely, all those properties specifically excluded are considered as ordinary assets and the profits or losses realized must have to be treated as ordinary gains or ordinary losses. Accordingly, "Capital Assets" includes property held by the taxpayer whether or not connected with his trade or business, but the term does not include any of the following, which are consequently considered "ordinary assets":

(1) stock in trade of the taxpayer or other property of a kind which would properly be included in the

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inventory of the taxpayer if on hand at the close of the taxable year;

(2) property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business; (3) property used in the trade or business of a character which is subject to the allowance for

depreciation provided in Section 34 (F) of the Tax Code; or

(4) real property used in trade or business of the taxpayer.

The statutory definition of "capital assets" practically excludes from its scope, it will be noted, all property held by the taxpayer if used in connection with his trade or business.

Capital Gain Tax; Nature (2001)

A, a doctor by profession, sold in the year 2000 a parcel of land which he bought as a form of investment in 1990 for Php 1 million. The land was sold to B, his colleague, at a time when the real estate prices had gone down and so the land was sold only for Php 800,000 which was then the fair market value of the land. He used the proceeds to finance his trip to the United States. He claims that he should not be made to pay the 6% final tax because he did not have any actual gain on the sale. Is his contention correct? Why? (5%)

SUGGESTED ANSWER:

No. The 6% capital gains tax on sale of a real property held as capital asset is imposed on the income presumed to have been realized from the sale which is the fair market value or selling price thereof, whichever is higher. (Section 24(D), NIRC). Actual gain is not required for the imposition of the tax but it is the gain by fiction of law which is taxable.

Ordinary Sale of a Capital Asset (1994)

Noel Langit and his brother, Jovy, bought a parcel of land which they registered in their names as pro-indiviso owners (Parcel A). Subsequently, they formed a partnership, duly registered with Securities and Exchange Commission, which bought another parcel of land (Parcel B). Both parcels of land were sold, realizing a net profit of P1,000,000.00 for parcel A and P500.000.00 for parcel B.

The BIR claims that the sale of parcel A should be taxed as a sale by an unregistered partnership. Is the BIR correct?

SUGGESTED ANSWER:

The BIR is not correct, since there is no showing that the acquisition of the property by Noel and Jovy Langit as pro indiviso owners, and prior to the formation of the partnership, was used, intended for use, or bears any relation whatsoever to the pursuit or conduct of the partnership business. The sale of parcel A shall therefore not be treated as a sale by an unregistered partnership, but an ordinary sale of a capital asset, and hence will be subject to the 5% capital gains tax and documentary

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

stamp tax on transfers of real property, said taxes to be borne equally by the co-owners.

ALTERNATIVE ANSWER:

The BIR is correct in treating the gain from the sale of parcel of land by Noel and Jovy Langit at a profit of P1,000,000.00. In the case of Pascual and Dragon v. Commissioner, G.R. No. 78133, October 18, 1988, the Supreme Court ruled that the sharing of returns does not in itself establish a partnership, whether or not the persons sharing therein have a joint or common right or interest in the property. The decision in said case cannot be applied here because clearly the parties organized a partnership duly registered with the Securities and Exchange Commission. They pooled their resources together with the purpose of dividing the profit between them.

Sales of Share of Stocks: Capital Gains Tax Return (1999)

HK Co. is a Hong Kong corporation not doing business in the Philippines. It holds 40% of the shares of A Co., a Philippine company, while the 60% is owned by P Co., a Filipino-owned Philippine corporation. HK Co. also owns 100% of the shares of B Co., an Indonesian company which has a duly licensed Philippine branch. Due to worldwide restructuring of the HK Co. group, HK Co. decided to sell all its shares in A and B Cos. The negotiations for the buy-out and the signing of the Agreement of Sale were all done in the Philippines. The Agreement provides that the purchase price will be paid to HK Co's bank account in the U. S. and that little to A and B Cos. Shares will pass from HK Co. to P Co. in HK where the stock certificates will be delivered. P Co. seeks your advice as to whether or not it will subject the payments of purchase price to Withholding Tax. Explain your advice. (10%)

SUGGESTED ANSWER:

P Co. should not subject the payments of the purchase price to withholding tax. While the seller is a non-resident foreign corporation which is not normally required to file returns in the Philippines, therefore, ordinarily all its income earned from Philippine sources is taxed via the withholding tax system, this is not the procedure availing with respect to sales of shares of stock. The capital gains tax on the sale of shares of stock of a domestic corporation is always required to be paid through a capital gains tax return filed. The sale of the shares of stock of the Indonesian Corporation is not subject to income tax under our jurisdiction because the income derived there from is considered as a foreign-sourced income.

ALTERNATIVE ANSWER:

Yes, but only on the shares of stocks of A Co. and only on the portion of the purchase price, which constitutes capital gains. Under the Tax Code of 1997, the capital gains tax imposed under Section 28(B)(5)(c) is collectible via the withholding of tax at source pursuant to Section 57 of the same Code.

(Note: The bar candidate might have relied on the provision of the Tax Code of 1997 which provides that the capital gains tax is imposed as withholding taxes (Section 57, NIRC). This procedure is impractical and, therefore, not followed in practice because the buyer/ withholding agent will not be in a position to determine how much income is realized by

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the seller from the sale. For this reason, any of the foregoing suggested answers should be given full credit).

Tax Basis: Capital Gains: Merger of Corporations (1994)

In a qualified merger under Section 34 (c) (2) of the Tax Code, what is the tax basis for computing the capital gains on: (a) the sale of the assets received by the surviving corporation from the absorbed corporation; and (b) the sale of the shares of stock received by the stockholders from the surviving corporation?

SUGGESTED ANSWER:

In a qualified merger under Section 34 (c) (2) of the Tax Code, the tax basis for computing the capital gains on: (a) the sale of the assets received by the surviving corporation from the absorbed corporation shall be the original/historical cost of the assets when still in the hands of the absorbed corporation.

(b) the sale of the shares of stock received by the stockholders from the surviving corporation shall be the acquisition/historical cost of assets transferred to the surviving corporation.

Tax Basis: Capital Gains: Tax-Free Exchange of Property (1994)

In a qualified tax-free exchange of property for shares under Section 34 (c) (2) of the Tax Code, what is the tax basis for computing the capital gains on: (a) the sale of the assets received by the Corporation; and (b) the sale of the shares received by the stockholders in exchange of the assets?

SUGGESTED ANSWER:

In a qualified tax free exchange of property for shares under Section 34 (c) (2) of the Tax Code, the tax basis for computing the gain on the:

(a) sale of the assets received by the corporation shall be the original/historical cost (purchase price plus expenses of acquisition) of the property/ assets given in exchange of the shares of stock.

(b) sale of the shares of stock received by the stockholders in exchange of the assets shall be the

original/historical cost of the property given in exchange of the shares of stock.

ALTERNATIVE ANSWER:

The basis in computing capital gains tax in a qualified tax-free exchange under Sec. 34 (c) (2) is:

(a) With respect to the asset received by the corporation the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer.

(b) With respect to the shares received by the stockholders in exchange of the assets - the same as the basis of the property, stock or securities exchanged, decreased by the money received and the fair market value of the other property received, and increased by the amount treated as dividend of the shareholder and the amount of any gain that was recognized on the exchange.