Republic of the Philippines There was no difficulty encountered in selling the
SUPREME COURT 28 small lots as their respective occupants
Manila
FIRST DIVISION
G.R. No. L-24248 July 31, 1974
ANTONIO TUASON, JR., petitioner,
vs.
JOSE B. LINGAD, as Commissioner of
Internal Revenue, respondent.
Araneta, Mendoza & Papa for petitioner.
Office of the Solicitor General Arturo A. Alafriz,
Assistant Solicitor General Felicisimo R. Rosete
and Special Attorney Antonio H. Garces for
respondent.
CASTRO, J.:p
In this petition for review of the decision of the
Court of Tax Appeals in CTA Case 1398, the
petitioner Antonio Tuason, Jr. (hereinafter
referred to as the petitioner) assails the Tax
Court's conclusion that the gains he realized from
the sale of residential lots (inherited from his
mother) were ordinary gains and not gains from
the sale of capital assets under section 34(1) of
the National Internal Revenue Code.
The essential facts are not in dispute.
In 1948 the petitioner inherited from his mother
several tracts of land, among which were two
contiguous parcels situated on Pureza and Sta.
Mesa streets in Manila, with an area of 318 and
67,684 square meters, respectively.
When the petitioner's mother was yet alive she
had these two parcels subdivided into twenty-
nine lots. Twenty-eight were allocated to their
then occupants who had lease contracts with the
petitioner's predecessor at various times from
1900 to 1903, which contracts expired on
December 31, 1953. The 29th lot (hereinafter
referred to as Lot 29), with an area of 48,000
square meters, more or less, was not leased to
any person. It needed filling because of its very
low elevation, and was planted to kangkong and
other crops.
After the petitioner took possession of the
mentioned parcels in 1950, he instructed his
attorney-in-fact, J. Antonio Araneta, to sell them.
bought them on a 10-year installment basis. Lot
29 could not however be sold immediately due to
its low elevation.
Sometime in 1952 the petitioner's attorney-in-fact
had Lot 29 filled, then subdivided into small lots
and paved with macadam roads. The small lots
were then sold over the years on a uniform 10-
year annual amortization basis. J. Antonio
Araneta, the petitioner's 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 petitioner reported his
income from the sale of the small lots
(P102,050.79 and P103,468.56, respectively) as
long-term capital gains. On May 17, 1957 the
Collector of Internal Revenue upheld the
petitioner's treatment of his gains from the said
sale of small lots, against a contrary ruling of a
revenue examiner.
In his 1957 tax return the petitioner as before
treated his income from the sale of the small lots
(P119,072.18) as capital gains and included only
½ thereof as taxable income. In this return, the
petitioner deducted the real estate dealer's tax he
paid for 1957. It was explained, however, that the
payment of the dealer's tax was on account of
rentals received from the mentioned 28 lots and
other properties of the petitioner. On the basis of
the 1957 opinion of the Collector of Internal
Revenue, the revenue examiner approved the
petitioner's treatment of his income from the sale
of the lots in question. In a memorandum dated
July 16, 1962 to the Commissioner of Internal
Revenue, the chief of the BIR Assessment
Department advanced the same opinion, which
was concurred in by the Commissioner of Internal
Revenue.
On January 9, 1963, however, the Commissioner
reversed himself and considered the petitioner's
profits from the sales of the mentioned lots as
ordinary gains. On January 28, 1963 the
petitioner received a letter from the Bureau of
Internal Revenue advising him to pay deficiency
income tax for 1957, as follows:
Net income per orig. investigation ...............
P211,095.36
Add:
56% of realized profit on sale
of lots which was deducted in the
income tax return and allowed in
the original report of examination .................
59,539.09 Net income per final investigation
................. P270,824.70
1
Less: Personal exemption
..................................... 1,800.00
Amount subject to tax .................................
P269,024.70 Tax due thereon
.......................................... P98,551.00
Less: Amount already assessed ....................
72,199.00 Balance ......... P26,352.00
Add:
½% monthly interest from
6-20-59 to 6-29-62 ....................................
4,742.36
TOTAL AMOUNT DUE AND
COLLECTIBLE .........................................
P31,095.36
The petitioner's motion for reconsideration of the
foregoing deficiency assessment was denied,
and so he went up to the Court of Tax Appeals,
which however rejected his posture in a decision
dated January 16, 1965, and ordered him, in
addition, to pay a 5% Surcharge and 1% monthly
interest "pursuant to Sec. 51(e) of the Revenue
Code."
Hence, the present petition.
The petitioner assails the correctness of the
opinion below that 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." The petitioner argues that (1) he is not
the one who leased the lots in question; (2) the
lots were residential, not commercial lots; and (3)
the leases on the 28 small lots were to last until
1953, before which date he was powerless to
eject the lessees therefrom.
The basic issue thus raised is whether the
properties in question which the petitioner had
inherited and subsequently sold in small lots to
other persons should be regarded as capital
assets.
1. 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.
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.1 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.2
Under section 34(b) (2) of the 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 twelve months, only
50% of the net capital gain shall be taken into
account in computing the net income.
The Tax Code's provision 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,3 the field of application of the
term it "capital assets" is necessarily narrow,
while its exclusions must be interpreted broadly.4
Consequently, 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.5 It bears
emphasis nonetheless that in the determination
of whether a piece of property is a capital asset
or an ordinary asset, a careful examination and
weighing of all circumstances revealed in each
case must be made.6
In the case at bar, after a thoroughgoing study of
all the circumstances relevant to the resolution of
the issue raised, this Court is of the view, and so
holds, that the petitioner's thesis is bereft of merit.
2
When the petitioner obtained by inheritance the
parcels in question, transferred to him was not
merely the duty to respect the terms of any
contract thereon, but as well the correlative right
to receive and enjoy the fruits of the business and
property which the decedent had established and
maintained.7 Moreover, the record discloses that
the petitioner owned other real properties which
he was putting out for rent, from which he
periodically derived a substantial income, and for
which he had to pay the real estate dealer's tax
(which he used to deduct from his gross
income).8 In fact, as far back as 1957 the
petitioner was receiving rental payments from the
mentioned 28 small lots, even if the leases
executed by his deceased mother thereon
expired in 1953. Under the circumstances, the
petitioner'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 comprising Lot 29 do not deserve
a different characterization for tax purposes. The
following circumstances in combination show
unequivocally that the petitioner was, at the time
material to this case, 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, e.g., P102,050.79 in 1953;
P103,468.56 in 1954; and P119,072.18 in 1957;
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. Under the
circumstances, this Court finds no error in the
holding below that the income of the petitioner
from the sales of the lots in question should be
considered as ordinary income.
2. This Court notes, however, that in ordering the
petitioner to pay the deficiency income tax, the
Tax Court also required him to pay a 5%
surcharge plus 1% monthly interest. In our
opinion this additional requirement should be
eliminated because the petitioner relied in good
faith upon opinions rendered by no less than the
highest officials of the Bureau of Internal
Revenue, including the Commissioner himself.
The following ruling in Connell Bros. Co. (Phil.)
vs. Collector of Internal Revenue9 applies with
reason to the case at bar:
We do not think Section 183(a) of
the National Internal Revenue
Code is applicable. The same
imposes the penalty of 25% when
the percentage tax is not paid on
time, and contemplates a case
where the liability for the tax is
undisputed or indisputable. In the
present case the taxes were paid,
the delay being with reference to
the deficiency, owing to a
controversy as to the proper
interpretation if Circulars Nos. 431
and 440 of the office of respondent-
appellee. The controversy was
generated in good faith, since that
office itself appears to have
formerly taken the view that the
inclusion of the words "tax included"
on invoices issued by the taxpayer
was sufficient compliance with the
requirements of said circulars. 10
ACCORDINGLY, the judgment of the Court of
Tax Appeals is affirmed, except the portion
thereof that imposes 5% surcharge and 1%
monthly interest, which is hereby set aside. No
costs.
Makalintal, C.J., Makasiar, Esguerra and Muñoz
Palma, JJ., concur.
Teehankee, J., took no part.
3
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-26284 October 8, 1986
TOMAS CALASANZ, ET AL., petitioners,
vs.
THE COMMISSIONER OF INTERNAL
REVENUE and the COURT OF TAX
APPEALS, respondents.
San Juan, Africa, Gonzales & San Agustin Law
Office for petitioners.
FERNAN, J.:
Appeal taken by Spouses Tomas and Ursula
Calasanz from the decision of the Court of Tax
Appeals in CTA No. 1275 dated June 7, 1966,
holding them liable for the payment of P3,561.24
as deficiency income tax and interest for the
calendar year 1957 and P150.00 as real estate
dealer's fixed tax.
Petitioner Ursula Calasanz inherited from her
father Mariano de Torres an agricultural land
located in Cainta, Rizal, containing a total area of
1,678,000 square meters. 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.
In their joint income tax return for the year 1957
filed with the Bureau of Internal Revenue on
March 31, 1958, petitioners disclosed a profit of
P31,060.06 realized from the sale of the
subdivided lots, and reported fifty per centum
thereof or P15,530.03 as taxable capital gains.
Upon an audit and review of the return thus filed,
the Revenue Examiner adjudged petitioners
engaged in business as real estate dealers, as
defined in Section 194 [s] 1 of the National
Internal Revenue Code, required them to pay the
real estate dealer's tax 2 and assessed a
deficiency income tax on profits derived from the
sale of the lots based on the rates for ordinary
income.
On September 29, 1962, petitioners received
from respondent Commissioner of Internal
Revenue:
a. Demand No. 90-B-032293-57 in
the amount of P160.00
representing real estate dealer's
fixed tax of P150.00 and P10.00
compromise penalty for late
payment; and
b. Assessment No. 90-5-35699 in
the amount of P3,561.24 as
deficiency income tax on ordinary
gain of P3,018.00 plus interest of P
543.24.
On October 17, 1962, petitioners filed with the
Court of Tax Appeals a petition for review
contesting the aforementioned assessments.
On June 7, 1966, the Tax Court upheld the
respondent Commissioner except for that portion
of the assessment regarding the compromise
penalty of P10.00 for the reason that in this
jurisdiction, the same cannot be collected in the
absence of a valid and binding compromise
agreement.
Hence, the present appeal.
The issues for consideration are:
a. Whether or not petitioners are
real estate dealers liable for real
estate dealer's fixed tax; and
b. 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.
The issues are closely interrelated and will be
taken jointly.
Petitioners assail their liabilities as "real estate
dealers" and seek to bring the profits from the
sale of the lots under Section 34 [b] [2] 3 of the
Tax Code.
The theory advanced by the petitioners is that
inherited land is a capital asset within the
meaning of Section 34[a] [1] of the Tax Code and
that an heir who liquidated his inheritance cannot
be said to have engaged in the real estate
business and may not be denied the preferential
tax treatment given to gains from sale of capital
assets, merely because he disposed of it in the
only possible and advantageous way.
4
Petitioners averred that the tract of land subject
of the controversy was sold because of their
intention to effect a liquidation. They claimed that
it was parcelled out into smaller lots because its
size proved difficult, if not impossible, of
disposition in one single transaction. They
pointed out that once subdivided, certainly, the
lots cannot be sold in one isolated transaction.
Petitioners, however, admitted that roads and
other improvements were introduced to facilitate
its sale. 4
On the other hand, respondent Commissioner
maintained that the imposition of the taxes in
question is in accordance with law since
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." Respondent likewise
contended that inherited property is by itself
neutral and the fact that the ultimate purpose is to
liquidate is of no moment for the important inquiry
is what the taxpayer did with the property.
Respondent concluded that since the lots are
ordinary assets, the profits realized therefrom are
ordinary gains, hence taxable in full.
We agree with the respondent.
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. 5 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.
However, there is no rigid rule or fixed formula by
which it can be determined with finality whether
property sold by a taxpayer was held primarily for
sale to customers in the ordinary course of his
trade or business or whether it was sold as a
capital asset. 6 Although several factors or
indices 7 have been recognized as helpful guides
in making a determination, none of these is
decisive; neither is the presence nor the absence
of these factors conclusive. Each case must in
the last analysis rest upon its own peculiar facts
and circumstances. 8
Also a property initially classified as a capital
asset may thereafter be treated as an ordinary
asset if a combination of 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. 9
Upon an examination of the facts on record, We
are convinced that the activities of petitioners are
indistinguishable from those invariably employed
by one engaged in the business of selling real
estate.
One strong factor against petitioners' contention
is the business element of development which is
very much in evidence. 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, 10 it was subdivided into small lots and
in the process converted into a residential
subdivision and given the name Don Mariano
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 11 submitted
together with the tax return in question disclosed
that a considerable amount was expended to
cover the cost of improvements. As a matter of
5
fact, the estimated improvements of the lots sold
reached P170,028.60 whereas the cost of the
land is only P 4,742.66. 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. 12
Another distinctive feature of the real estate
business discernible from the records is the
existence of contracts receivables, which stood at
P395,693.35 as of the year ended December 31,
1957. The sizable amount of receivables in
comparison with the sales volume of
P446,407.00 during the same period signifies that
the lots were sold on installment basis and
suggests the number, continuity and frequency of
the sales. Also of significance is the circumstance
that the lots were advertised 13 for sale to the
public and that sales and collection commissions
were paid out during the period in question.
Petitioners, likewise, urge that the lots were sold
solely for the purpose of liquidation.
In Ehrman vs. Commissioner,14 the American
court in clear and categorical terms rejected the
liquidation test in determining whether or not a
taxpayer is carrying on a trade or business The
court observed that the fact that property is sold
for purposes of liquidation does not foreclose a
determination that a "trade or business" is being
conducted by the seller. The court enunciated
further:
One may, of course, liquidate a
capital asset. To do so, it is
necessary to sell. The sale may be
conducted in the most
advantageous manner to the seller
and he will not lose the benefits of
the capital gain provision of the
statute unless he enters the real
estate business and carries on the
sale in the manner in which such a
business is ordinarily conducted. In
that event, the liquidation
constitutes a business and a sale in
the ordinary course of such a
business and the preferred tax
status is lost.
In view of the foregoing, We hold that in the
course of selling the subdivided lots, petitioners
engaged in the real estate business and
accordingly, the gains from the sale of the lots are
ordinary income taxable in full.
WHEREFORE, the decision of the Court of Tax
Appeals is affirmed. No costs.
SO ORDERED.

We fail to see that the reasons

behind a person's entering into a
business-whether it is to make
money or whether it is to liquidate-
should be determinative of the
question of whether or not the gains
resulting from the sales are
ordinary gains or capital gains. The
sole question is-were the taxpayers
in the business of subdividing real
estate? If they were, then it seems
indisputable that the property sold
falls within the exception in the
definition of capital assets . . . that
is, that it constituted 'property held
by the taxpayer primarily for sale to
customers in the ordinary course of
his trade or business.

Additionally, in Home Co., Inc. vs. Commissioner,

15 the court articulated on the matter in this wise:

6
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-16021 August 31, 1962
ANTONIO PORTA FERRER, petitioner,
vs.
(COLLECTOR) now COMMISSIONER OF
INTERNAL REVENUE, respondent.
Alberto Cacnio and Associates for petitioner.
Office of the Solicitor General for respondent.
REGALA, J.:
This is a petition to review the decision of the
Court of Tax Appeals, denying petitioner's claim
for refund against respondent.
The petitioner was the sole proprietor of the "La
Suiza Bakery" on R. Hidalgo, Quiapo, Manila. He
owned this bakery from October 16, 1951 up to
September 15, 1955, when he sold the same to
Juan Pons for the sum of P100,000.00. The
assets of the bakery consisted of accounts
receivable raw materials, wrapping supplies,
firewood, unexpired insurance, good-will,
machinery and equipment, and furniture and
fixtures, with a total book value of P74,321.91. In
selling the bakery, petitioner spent P5,000.00 for
broker's commission and P1,000.00 for
accountant's fee, or a total of P6,000.00.
After deducting the total book value of the assets
and the incidental expenses from the gross
selling price, petitioner filed on February 14, 1956
his income tax return, showing a net profit of
P19,678.09 as having been realized from the sale
of the bakery. On the basis of this amount, he
paid P2,439.00 as income tax on February 15,
1956.
Petitioner later requested the respondent to
refund to him the sum of P2,030.00, claiming that
the bakery was a capital asset which he had held
for more than twelve months, so that the profit
from its sale was a long term capital gain, and
therefore, only 50 per cent of it was taxable under
the National Internal Revenue Code. When no
action was taken by respondent on his request,
petitioner filed a petition for refund in the Court of
Tax Appeals.
The Tax Court held that the sale of the bakery did
not constitute a sale of a single asset but of
individual assets, some of which were capital
assets while others were ordinary assets. But
since petitioner failed to show what portion of the
selling price of the bakery was fairly attributable
to each asset, the Tax Court held that it could not
ascertain the capital and/or ordinary gains taxes
properly payable upon the sale of the business.
For this reason, it denied petitioner's claim for
refund.
In his first assignment of error, the petitioner
contends that the Tax Court erred in holding that
he had made a profit of P19,678.09 from the sale
of the bakery, upon which amount the income tax
was based. The petitioner now claims that the
business had liabilities amounting to P19,183.01
which, if deducted along with the book value of
the assets and the incidental expenses from the
selling price of P100,000.00, would show a profit
of P495.05 only.
We agree with the contention of the respondent
that the matter of computation of profit cannot be
taken up in this appeal because the same was
neither raised in the Tax Court nor made within
the issues of the pleadings of the parties. (Sec.
19, Rule 48, Rules of Court.) There, the only
issues were whether the Tax Court had
jurisdiction over this case and whether or not the
sale of the bakery was a sale of capital asset or
of individual assets comprising the business. The
rule is well settled that no question will be
considered by the appellate court which has not
been raised in the court below. When a party
deliberately adopts a certain theory, and the case
is tried and decided upon the theory in the court
below, he will not be permitted to change his
theory on appeal, cause to permit him to do so
would be unfair to the adverse party. (Northern
Motors, Inc. v. Prince Line, et al., G.R. No. L-
13884, February 29, 1960 citing Toribio v.
Decasa, 55 Phil. 461; San Agustin v. Barrios, 68
Phil. 475; Molina v. Somes, 24 Phil. 49; and
Agoncillo and Mariño v. Javier, 38 Phil. 424.)
In his second assignment of error, petitioner
contends that the sale of the business known as
"La Suiza Bakery" was a sale not of the individual
assets comprising the same but of an entire,
single asset which, under the law, is a capital
asset.
Section 34 of the Tax Code provides in part:
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
7
 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, of property used in the trade or
business, of a character which is subject to
allowance for depreciation provided in
subsection (f) of section thirty; or real
property used in the trade or business of
the taxpayer.
xxx xxx xxx
(b) Percentage taken into account. — In
the case of a taxpayer, other than a
corporation, only the following percentage
of the gain or loss recognized upon the
sale shall be taken into account in
computing net capital gain, net capital
loss, and net income.
(1) One hundred per centum if the capital
asset has been held for not more than
twelve months;
(2) Fifty per centum if the capital asset has
been held for more than twelve months.
Parenthetically, it may be noted that tax rates are
graduated upwards as the total amount of income
increases. But capital assets are generally held
for a period in excess of a year. When held for
more than a year, the profit or loss realized is
reported for tax purposes only in the year that the
asset was sold or exchanged even though the
increment might have developed over several
years or was the result of years of effort. Since
the gain is taxed all in one year, a higher rate of
tax would necessarily be paid be included;
similarly, only a limited amount of any loss than if
a part of the gain were reported each year the
asset was held. In an attempt to compensate for
this, only a percentage of the gain on such sales
is required to can be deducted in the year in which
realized. (Alexander, Federal Tax Handbook, p.
411, 1959 ed.)
The issue then is whether or not the sale of the
La Suiza Bakery was a sale of a capital asset so
that the profits derived from the sale is taxable up
to 50 per cent only, considering that petitioner
owned it for more than twelve months, or whether
the business is to be comminuted into its
component parts, each part to be tested against
the definition of a capital assets in the Tax
Code.1äwphï1.ñët
We find that Section 34 (a) (1) of our Tax Code is
patterned after Section 117 (a) (1) of the U.S.
Internal Revenue Code (26 USCA, Sec. 117 [a]
[17]). In interpreting this latter provision, the
United States Circuit Court of Appeals held in the
leading case of Williams v. McGowan, 152 F2d
570, 162 ALR 1036 thus —
. . . We have to decide only whether upon
the sale of a going business it is to be
comminuted into its fragments, and these
are to be separately matched against the
definition in Section 117 (a) (1), or whether
the whole business is to be treated as if it
were a single piece of property.
Our law has been sparing in the creation
of juristic entities; it has never, for
example, taken over the Roman
"universitas facti" and indeed for many
years it fumbled uncertainly with the
concept of a corporation. One might have
supposed that partnership would have
been an especially promising field in which
to raise up an entity, particularly since
merchants have always kept their
accounts upon that basis. Yet there too our
law resisted at the price of great and
continuing confusion; and even when it
might be thought that a statute admitted, if
it did not demand, recognition of the firm
as an entity, the old concepts prevailed.
Francis v. McNeal, 228 US 695, 33 S Ct
701, 57 L. ed. 1029, LRA 1915 E 706. And
so, even though we might agree that under
the influence of the Uniform Partnership
Act a partner's interest in the firm should
be treated as indivisible, and for that
reason a "capital asset" within Section 117
(a) (1), we should be chary about
extending further so exotic a jural concept.
Be that as it may, in this instance the
section itself furnishes the answer. It starts
in the broadest way by declaring that all
"property" is "capital asset", and then
makes three exceptions. The first is "stock
in trade . . . or other property of a kind
which would properly be included in the
inventory"; next comes "property held . . .
primarily for sale to customers"; and finally
property "used in the trade or business of
a character which is subject to . . .
allowance for depreciation." In the face of
this language, although it may be true that
a "stock in trade," taken by itself should be
treated as a "universitas facti" by no
possibility can a whole business be so
treated; and the same is true as to any
property within the other exceptions.
Congress plaintly did mean to comminute
8
 the elements of a business; plainly it did Concepcion and Barrera, JJ., concur in the
not regard the whole as "capital assets." result.
Padilla, J., took no part.
This ruling was cited with approval by the United
State Supreme Court in Watson v.
Commissioner, 345 U.S. 544, 97 L. ed. 1232.

In line with this ruling, We hold that the sale of the

"La Suiza Bakery" was a sale not of a single asset
but of individual assets that made up the
business. And since petitioner failed to point out
what part of the price he had received could be
fairly attributed to each asset, the Tax Court
correctly denied his claim.

While agreeing with the Tax Court that the good-

will of the business is a capital asset, petitioner
nevertheless contends that there is neither
factual nor legal basis for concluding that the
good-will of the bakery which he had acquired for
P10,000.00 was sold at the same price. The
petitioner states that he sold the assets of the
bakery at their stated book value and that
whatever amount of the selling price exceeded
the total book value of the assets minus the good-
will should be attributed to the latter alone. In
short, it is urged that whatever profit was made
from the sale came solely from the bakery's good-
will which the Tax Court held to be a capital asset,
only 50 per cent of which was taxable.

The Tax Court's finding that the petitioner

acquired and sold the good-will of the bakery for
the same amount is supported by evidence
(Exhibit "4" of respondent) which has not been
rebutted. Indeed, it is inconceivable how a
business, which was heavily indebted as
petitioner contends can ever possess a good-will
that can command so high a price.

For this reason, We believe that any profit which

the petitioner may have gained in the same must
have come from the sale of the other assets of
the business which must have been sold for
amounts other than their stated book value. As
the Tax Court held, in order to ascertain the
capital and/or ordinary gains taxes properly
payable on the sale of a business, including its
tangible assets, it is incumbent upon the taxpayer
to show not only the cost basis of each asset, but
also what portion of the selling price is fairly
attributable to each asset. (Cohen v. Kelm, 119 F
supp. 376.)

WHEREFORE, the decision of the Court of Tax

Appeals is hereby affirmed, with costs against the
petitioner.

Bengzon, C.J., Bautista Angelo, Labrador,

Paredes, Dizon and Makalintal, JJ., concur.
9