G.R. No. L-19537 May 20, 1965
The late LINO GUTIERREZ substituted by ANDREA C. VDA. DE GUTIERREZ, ANTONIO D. GUTIERREZ, GUILLERMO D. GUTIERREZ, SANTIAGO D. GUTIERREZ and TOMAS D. GUTIERREZ, petitioners, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

FACTS

Lino Gutierrez was primarily engaged in the business of leasing real property. He filed his income tax returns for 1951-1954 and paid the taxes declared. On July 10, 1956, the Commissioner of Internal Revenue assessed deficiency income taxes for those years totaling P11,841.00. The deficiency arose from: (1) the disallowance of deductions for alleged business expenses considered as personal or capital expenditures; (2) the disallowance of depreciation on Gutierrez’s residence; and (3) the addition to gross income of unreported receipts, including his wife’s income and understated profits from the sale of real properties. The Commissioner treated the sold properties as ordinary assets (used in trade or business), thus taxing 100% of the profits, whereas Gutierrez treated them as capital assets and declared only 50%. For a 1943 property sold in 1953, the Commissioner used the Ballantyne Scale of Values to convert the Japanese military notes purchase price to Commonwealth pesos, resulting in a profit instead of a declared loss. The Court of Tax Appeals upheld the assessment. Gutierrez appealed. He died during the appeal and was substituted by his heirs.
ISSUES:
1. Are the taxpayer’s claimed deductions proper and allowable?
2. May the Ballantyne Scale of Values be applied in determining the 1943 acquisition cost of a property sold in 1953 for income tax purposes?
3. Are real properties used in the taxpayer’s trade or business capital or ordinary assets?
4. Has the right of the Commissioner to collect the deficiency income tax for 1951 and 1952 prescribed?
5. Has the right to collect by distraint and levy the deficiency tax for 1953 prescribed? If not, may the taxpayer’s real property be distrained and levied upon without first exhausting his personal property?

RULING

1. On Deductions: The Court ruled on each category:
* Personal Expenses (Not Deductible): Transportation to funerals, opera tickets, iron door for residence, alms, contributions to individuals, officers’ jewels donated to a lodge, fines for late tax payment, and depreciation on personal residence.
* Business Expenses (Deductible): Cost of furniture given as a business commission, expenses for the National Convention of Filipino Businessmen, and Homeowners’ Association luncheon and cruise, as these were for business enhancement. Litigation expenses to collect rentals and eject tenants are ordinary and necessary.
* Car Expenses: The car was used for both personal and business. The Court allowed one-half of the driver’s salary, car expenses, and depreciation as deductible, modifying the Commissioner’s one-third allowance.
* Repairs vs. Capital Expenditures: Expenses for electrical supplies, paint, lumber, plumbing, cement, etc., for repairing rental apartments to keep them in ordinary operating condition are deductible repairs. However, expenses for watching laborers during construction, unpaid realty tax assumed from a seller, and costs for iron bars, venetian blinds, water pumps, and property relocation/registration are capital expenditures that form part of the asset’s cost and are not immediately deductible.
* Books: The cost of “Comments on the Rules of Court” is a capital expenditure with a useful life of more than one year, not deductible as an ordinary expense.
2. On Ballantyne Scale: Yes. For income tax purposes, the cost basis of property acquired during the Japanese occupation and sold after liberation must be the fair market value of the Japanese war notes at the time of acquisition, converted to its equivalent in Philippine Commonwealth pesos using a recognized scale. The Ballantyne Scale of Values is proper for this conversion.
3. On Nature of Assets: The real properties sold were ordinary assets, not capital assets. Since Gutierrez was engaged in the real estate leasing business, the lots and buildings used in that business are considered property held primarily for sale to customers in the ordinary course of his trade or business. Therefore, 100% of the profits from their sale is taxable, not just 50%.
4. On Prescription for 1951 & 1952: No. The right to collect had not prescribed. The three-year prescriptive period for assessment (from the date the return was filed) was suspended when Gutierrez requested a reinvestigation. The waiver of the statute of limitations was valid, and the assessment was issued within the agreed extended period.
5. On Prescription and Distraint for 1953: No, the right to collect by distraint/levy had not prescribed. The five-year period for collection by distraint/levy (from the date of assessment) commenced on July 10, 1956. The warrant of distraint and levy was issued on February 17, 1958, well within the five-year period. Furthermore, the law does not require exhaustion of personal property before levying on real property.
DISPOSITIVE PORTION:
The decision was modified. Petitioners (Gutierrez’s heirs) were ordered to pay deficiency income taxes of P1,687.00 (1951), P848.00 (1952), P5,374.00 (1953), and P4,020.00 (1954), totaling P11,929.00, plus statutory penalties in case of delinquency.