It appears then that the acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being JUSTLY compensated, is embraced within the meaning of the term "sale" "disposition of property", and the proceeds from said transaction clearly fall within the definition of gross income laid down by Section 29 of the Tax Code of the Philippines.
FACTS:
1. Maria Morales, married to Gutierrez(spouses), was the owner of an agricultural land. The U.S. Gov(pursuant to Military Bases Agreement) wanted to expropriate the land of Morales to expand the Clark Field Air Base.
2. The Republic was the plaintiff, and deposited a sum of Php 152k to be able to take immediate possession. The spouses wanted consequential damages but instead settled with a compromise agreement. In the compromise agreement, the parties agreed to keep the value of Php 2,500 per hectare, except to some particular lot which would be at Php 3,000 per hectare.
3. In an assessment notice, CIR demanded payment of Php 8k for deficiency of income tax for the year 1950.
4. The spouses contend that the expropriation was not taxable because it is not "income derived from sale, dealing or disposition of property" as defined in Sec. 29 of the Tax Code. The spouses further contend that they did not realize any profit in the said transaction. CIR did not agree.
5. The spouses appealed to the CTA. The Solicitor General, in representation of the respondent Collector of Internal Revenue, filed an answer that the profit realized by petitioners from the sale of the land in question was subject to income tax, that the full compensation received by petitioners should be included in the income received in 1950, same having been paid in 1950 by the Government. CTA favored SolGen but disregarded the penalty charged.
6. Both parties appealed to the SC.
ISSUES:
1. Whether or not that for income tax purposes, the expropriation should be deemed as income from sale and any profit derived therefrom is subject to income taxes capital gain?
2. Whether or not there was profit or gain to be taxed?
HELD: Yes to both. CTA decision affirmed. It is subject to income tax.
RATIO 1: It is to be remembered that said property was acquired by the Government through condemnation proceedings and appellants' stand is, therefore, that same cannot be considered as sale as said acquisition was by force, there being practically no meeting of the minds between the parties. U.S jurisprudence has held that the transfer of property through condemnation proceedings is a sale or exchange within the meaning of section 117 (a) of the 1936 Revenue Act and profit from the transaction constitutes capital gain" "The taking of property by condemnation and the, payment of just compensation therefore is a "sale" or "exchange" within the meaning of section 117 (a) of the Revenue Act of 1936, and profits from that transaction is capital gain.
SEC. 29. GROSS INCOME. — (a) General definition. — "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, sales or dealings in property, whether real or personal, growing out of ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the transactions of any business carried on for gain or profit, or gains, profits, and income derived from any source whatsoever.
SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES.
—
(a) Gross income from sources within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines:
x x x x x x x x x
(5) SALE OF REAL PROPERTY. — Gains, profits, and income from the sale of real property located in the Philippines;
x x x x x x x x x
It appears then that the acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being JUSTLY compensated, is embraced within the meaning of the term "sale" "disposition of property", and the proceeds from said transaction clearly fall within the definition of gross income laid down by Section 29 of the Tax Code of the Philippines.
RATIO 2: As to appellant taxpayers' proposition that the profit, derived by them from the expropriation of their property is merely nominal and not subject to income tax, We find Section 35 of the Tax Code illuminating. Said section reads as follows:
SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE SALE OR OTHER DISPOSITION OF PROPERTY. —The gain derived or loss sustained from the sale or other disposition of property, real or personal, or mixed, shall be determined in accordance with the following schedule:
(a) xxx xxx xxx
(b) In the case of property acquired on or after March first, nineteen hundred and thirteen, the cost thereof if such property was acquired by purchase or the fair market price or value as of the date of the acquisition if the same was acquired by gratuitous title.
x x x x x x x x x
The records show that the property in question was adjudicated to Maria Morales by order of the Court of First Instance of Pampanga on March 23, 1929, and in accordance with the aforequoted section of the National Internal Revenue Code, only the fair market price or value of the property as of the date of the acquisition thereof should be considered in determining the gain or loss sustained by the property owner when the property was disposed, without taking into account the purchasing power of the currency used in the transaction. The records placed the value of the said property at the time of its acquisition by appellant Maria Morales P28,291.73 and it is a fact that same was compensated with P94,305.75 when it was expropriated. The resulting difference is surely a capital gain and should be correspondingly taxed.
