(Article published in the Aug 18,2003 issue of TODAY, Business Section)
Atty. Allan Paguia, whom I taught Taxation and not Remedial Law
when he was a student at the Ateneo Law School, recently suggested that
the Sandiganbayan, in effect reverse the Supreme Court, the entire nation
eagerly watched with bated breath how the legal curiosity would pay itself
Sandiganbayan, it is now history, demurred.
Something of the kind, however, occurred the few months earlier
while nobody was watching, but unfortunately for my admittedly sui generis
student, he could not claim the credit for it.
The achievement belongs to BIR Commissioner Guilermo L. Parayno Jr.
and Finance Secretary Jose Isidro N. Camacho, neither of whom learned
their taxation from me.
In an issuance dated December 27, 2003, but received by the BIR
Records Section on February 11, 2003, at 4:52 p.m., the good commissioner
recommended and the good secretary approved Revenue Regulations 7-2003.
Regulations 7-2003 provides the guidelines to be used by all and sundry in
determining whether a particular piece of real property is a capital asset
or an ordinary asset.
Those guidelines, for the most part, repudiate the principles
behind the case of Tomas Calasanz, et al v. Commissioner of Internal
Revenue, G.R. L-26284, promulgated by the Supreme Court on October 9,
Calasanz involved a taxpayer who inherited a large parcel of
In order to liquidate her inheritance, the taxpayer had the land
surveyed and subdivided into lots. After putting in roads, gutters,
drainage and lighting a system, the lots were sold to the public at a
One of the issues before the Supreme Court was whether the gains
from the sales were capital gains (because the subdivided lots were
considered “capital assets”) or ordinary gains (because the lots were
classified as “ordinary assets”).
The tax consequences of the lots being capital assets are,
naturally, significantly different from the tax consequences of their
being ordinary assets.
In deciding the issue, the Supreme Court thought it useful to state
what the law is on how to determine whether a sale is one of a capital
asset or of an ordinary asset.
start with, Calasanz recognized that there was no rigid rule or fixed
formula by which it can be determined with finality whether property sold
by a taxpayer was a capital or an ordinary asset.
Said the Supreme Court: “Although several factors or indices have
been recognized as helpful guides in making a determination, none of this
is decisive; neither is the presence nor the absence of these factors
Each case must in the last analysis rest upon its own peculiar
facts and circumstances.”
a footnote, the Supreme Court, to illustrate the number and the variety of
the items to be looked into, called on one of its earlier decisions,
Tuason, Jr. v. Lingad, 58 SCRA 170, which listed a number of factors to be
considered in determining the correct boundary between a capital and an
These factors were: (a) the purpose for which the property was
initially acquired; (b) the purpose for which the property was
subsequently held; (c) the extent to which improvements, if any, were made
to the property of the taxpayer; (d) the frequency, number and continuity
of sales; (e) the extent and number of the transactions involved; (f) the
ordinary business of the taxpayer; (g) the extent of advertising,
promotion, or other activities used in soliciting buyers for the sale of
the property; (h) the listing of property with brokers; and (i) the
purpose for which the property was held at the time of sale.
an asset maybe a capital at one time but be ordinary at time of sale, and
vice versa, is clearly acknowledge when the Supreme Court observed that
“a property initially classified as a capital asset may thereafter be
treated as an ordinary asset if a combination of factors indubitably tend
to show that the activity was in furtherance of or in the course of the
taxpayer’s trade or business.”
In order words, the characterization of being a “capital” or an
“ordinary” asset changes and is not cast in stone.
Undoubtedly that situation requires a process where both the
taxpayer and the tax collector must use their brains in order to correctly
determine whether an asset is capital or ordinary.
Apparently, however, the use of brains was considered by whoever
thought of the regulations to be dangerous to the financial health of the
Hence, Revenue Regulations 7-2003.
are some no-brainer guidelines from Revenue Regulations 7-2003.
properties acquired by banks through foreclosure sales are, following a
ruling issued on June 29, 1998 (BIR Ruling 103-98), considered as their
ordinary assets because, I assume, foreclosing real-estate mortgages is
part of a bank’s business and the banks may thereby be classified as
being the real-estate business.
But the banks are not considered to be habitually engaged in the
real-estate business for the purpose of the withholding tax duty imposed
on sellers of real estate.
This fine distinction, appreciated only by astute, results in
larger withholding tax on sales made by banks of their ROPOAS.
property purchased by a taxpayer engaged in the real-estate business for
future use in the business, even though this purpose is later thwarted by
circumstances beyond the taxpayer’s control, does not lose its character
as an ordinary asset.
Nor does a mere discontinuance of the active use of property change
its character previously established as a business property.
As the French are said to say, once a whore, always a whore.
taxpayers who are not engaged in the real-estate business, real properties
which are used or being used or have been previously used in the trade or
business of the taxpayer shall be considered ordinary assets.
leave no doubt, the regulations reiterate, that “so long as the property
is or has been used for business purposes, whether for the benefit of the
owner or any of its members or stockholders, its shall be considered as an
the case of a taxpayer who changed its real-estate business to a nonreal
estate business, or who amended its articles of incorporation from a
real-estate business to a nonreal estate business, the change of business
or amendment of the primary purpose of the business shall not result in
the reclassification of real property held by it from ordinary asset to
real properties originally acquired by a taxpayer engaged in the
real-estate business shall not result in its conversion into a capital
asset even if the same is subsequently abandoned or becomes idle.
is bad enough that all these are contrary to the Supreme Court’s
pronouncement that the purpose for which the property was initially
acquired, the purpose for which it was subsequently held, and the purpose
for which the property was held at the time of the sale are to be all
considered in making the needed determination.
this one takes the cake: A taxpayer whose primary purpose of engaging in
business, or whose Articles of Incorporation states that its primary
purpose is to engage in real-estate business shall be deemed to be engaged
in the real-estate business.
This means that if a corporation whose primary purpose, as stated
in its Articles of Inc., is to engage in the business of developing
subdivisions, buys, as its first and only transaction after incorporation,
a parcel of land and then uses it instead to raise chickens for commercial
purposes – a secondary purpose stated in the same articles – that
corporation will be considered as engaged in the real-estate business.
My heart goes out to Allan Paguia. He took the wrong train to fame, undoubtedly in good faith, and will now be remembered as one who knows his tax better than he knows his remedial law. But then again his is a better fate than that of whoever crafted Revenue Regulations 7-2003. Commissioner Parayno and Secretary Camacho would not want to remember that one at all.