CALASANZ v CIR DOCTRINE: To To determine whether it is in trade or business, the decision should be based on circumstances. Land was improved after acceptance and subdivided and sold incurring a large amount of receivables. SUMMARY: Ursula Ursula Calasanz Calasanz inherited inherited from from her father father an agricult agricultural ural land. Improvem Improvements ents were were introduced to make such land saleable and later in it was sold to the public at a prot. The evenue e!aminer ad"udged Ursula and her spouse as engaged in business as real estate dealers and re#uired them to pa$ the real estate dealer%s ta!. The activities of Calasanz are indistinguishable from those invariabl$ emplo$ed b$ one engaged in the business of selling real estate. &ne strong factor is the business element of development which is ver$ much in evidence. The$ did not sell the land in the condition in which the$ ac#uired it. Inherited land which an heir subdivides and makes improvements several times higher than the original cost of the land is not a capital asset but an ordinar$ asses. Thus, in the course of selling the subdivided subdivided lots, the$ engaged in the real estate business and accordingl$ the gains from the sale of the lots are ordinar$ income ta!able in full.
Facts: 'etitioner Facts: 'etitioner Ursula Calasanz inherited from her father de Torres an agricultural land located in izal with an area of (.)* s#m. In order to li#uidate her inheritance, Ursula Calasanz had the land surve$ed and subdivided into lots. Improvements, such as good roads, concrete gutters, drainage and lighting s$stem, were introduced introduced to make the lots saleable. +oon after, the lots were sold to the public at a prot. In their "oint income ta! return for the $ear (- led with the /ureau of Internal evenue on *arch 0(, (-1, petitioners disclosed a prot of '0(,2)2.2) '0(,2)2.2) realized from the sale of the subdivided lots, and reported ft$ per centum thereof or '(-,-02.20 as ta!able capital gains. Upon an audit and review of the return thus led, the evenue 3!aminer ad"udged petitioners engaged in business as real estate dealers, as dened in the 4IC, and re#uired them to pa$ the real estate dealer5s ta! and assessed a decienc$ income ta! on prots derived from from the sale of the lots based on the rates for ordinar$ income. Ta! Ta! court upheld upheld the nding nding of the CI, CI, hence, the present present appeal. ISSUES: a. 6hether or not petitioners are real estate dealers liable for real estate dealer5s !ed ta!. 73+ b. 6hether the gains realized from the sale of the lots are ta!able in full as ordinar$ income or capital gains ta!able at capital gain rates. &8I497 I4C&*3 RATIO: The assets of a ta!pa$er are classied classied for income ta! purposes purposes into ordinar$ ordinar$ assets and capital assets. assets. +ection 0:;a< ;(< of the 4ational Internal evenue Code broadl$ denes capital assets as follows= ;(< Capital assets.>The term 5capital assets5 means propert$ held b$ the ta!pa$er ;whether or not connected with his trade or business<, but does not include, stock in trade of the ta!pa$er or other propert$ of a kind which would properl$ be included, in the inventor$ of the ta!pa$er if on hand at the close of the ta!able $ear, or propert$ held b$ the ta!pa$er primaril$ for sale to customers in the ordinar$ course of his trade or business, or propert$ used in the trade or busin business ess of a chara characte cterr which which is sub"ec sub"ectt to the allow allowanc ance e for depre depreci ciati ation on prov provide ided d in subsection ;f< of section thirt$? or real propert$ used in the trade or business of the ta!pa$er. The statutory statutory def!t!o def!t!o o" ca#!ta$ ca#!ta$ assets !s e%at!ve e%at!ve ! ature& ature& I" the asset !s ot a'o% the e(ce#t!os) !t !s a ca#!ta$ asset* coverse$y) assets "a$$!% +!th! the e(ce#t!os are ord!ary assets& Ad ecessar!$y) ay %a! resu$t!% "ro' the sa$e or e(cha%e o" a asset !s a ca#!ta ca#!ta$$ %a! %a! or a ord!a ord!ary ry %a! de#ed de#ed!% !% o the ,!d o" asset asset !vo$ved !vo$ved ! the trasact!o& @owever, there is no rigid rule or !ed formula b$ which it can be determined with nalit$ whether propert$ sold b$ a ta!pa$er was held primaril$ for sale to customers in the ordinar$ course of his trade or business or whether it was sold as a capital asset. 9lthough several several factors or indices have been recognized as helpful guides in making a determination, none of these is decisive? neither is the presence presence nor the absence of these factors conclusive. 3ach case must in the last anal$sis rest upon its own peculiar facts and circumstances.
9lso a propert$ initiall$ classied as a capital asset ma$ thereafter be treated as an ordinar$ asset if a combination of the factors indubitabl$ tend to show that the activit$ was in furtherance of or in the course of the ta!pa$er5s trade or business. Thus) a sa$e o" !her!ted rea$ #ro#erty usua$$y %!ves ca#!ta$ %a! or $oss eve thou%h the #ro#erty has to -e su-d!v!ded or !'#roved or -oth to 'a,e !t sa$a-$e& .o+ever) !" the !her!ted #ro#erty !s su-stat!a$$y !'#roved or very act!ve$y so$d or -oth !t 'ay -e treated as he$d #r!'ar!$y "or sa$e to custo'ers ! the ord!ary course o" the he!r/s -us!ess& In this case, the sub"ect land is considered as an ordinar$ asset. 0et!t!oers d!d ot se$$ the $ad ! the cod!t!o ! +h!ch they ac1u!red !t& 2h!$e the $ad +as or!%!a$$y devoted to r!ce ad "ru!t trees) !t +as su-d!v!ded !to s'a$$ $ots ad ! the #rocess coverted !to a res!det!a$ su-d!v!s!o ad %!ve the a'e Do Mar!ao Su-d!v!s!o& E(tes!ve !'#rove'ets $!,e the $ay!% out o" streets) costruct!o o" cocrete %utters ad !sta$$at!o o" $!%ht!% syste' ad dra!a%e "ac!$!t!es) a'o% others) +ere uderta,e to ehace the va$ue o" the $ots ad 'a,e the' 'ore attract!ve to #ros#ect!ve -uyers& The audited nancial statements submitted together with the ta! return in #uestion disclosed that a considerable amount was e!panded to cover the cost of improvements. There is authorit$ that a propert$ ceases to be a capital asset if the amount e!pended to improve it is double its original cost, for the e!tensive improvement indicates that the seller held the propert$ primaril$ for sale to customers in the ordinar$ course of his business. Aother d!st!ct!ve "eature o" the rea$ estate -us!ess d!scer!-$e "ro' the records !s the e(!stece o" cotracts rece!va-$es, which stood at '0-,)0.0-. The sizable amount of receivables in comparison with the sales volume of '::),:2.22 during the same period signies that the lots were sold on installment basis and suggests the number, continuit$ and fre#uenc$ of the sales. 9lso of signicance is the circumstance that the lots were advertised for sale to the public and that sales and collection commissions were paid out during the period in #uestion. 'etitioners argument that the$ are merel$ li#uidating the land must also fail. In Ehrman vs. Commissioner, the 9merican court in clear and categorical terms re"ected the li#uidation test in determining whether or not a ta!pa$er is carr$ing on a trade or business The court observed that the fact that propert$ is sold for purposes of li#uidation does not foreclose a determination that a Atrade or businessA is being conducted b$ the seller. &ne ma$, of course, li#uidate a capital asset. To do so, it is necessar$ to sell. The sale ma$ be conducted in the most advantageous manner to the seller and he will not lose the benets 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 ordinaril$ conducted. In that event, the li#uidation constitutes a business and a sale in the ordinar$ course of such a business and the preferred ta! status is lost.
