G.R. No. L-16021, August 31, 1962
ANTONIO PORTA FERRER, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

FACTS

Petitioner Antonio Porta Ferrer, sole proprietor of “La Suiza Bakery,” sold the entire business for P100,000.00 on September 15, 1955, after owning it since October 1951. The assets included accounts receivable, raw materials, supplies, goodwill, machinery, and fixtures, with a total book value of P74,321.91. After deducting this book value and incidental sale expenses of P6,000.00, petitioner reported a net profit of P19,678.09 in his 1956 income tax return and paid P2,439.00 as tax.
Subsequently, petitioner sought a refund of P2,030.00 from the Commissioner of Internal Revenue. He contended the bakery was a capital asset held for over twelve months, making the profit a long-term capital gain where only 50% is taxable under the Tax Code. The Commissioner did not act, prompting petitioner to file a petition for refund with the Court of Tax Appeals (CTA).

ISSUE

Whether the sale of the entire bakery business constitutes the sale of a single capital asset, entitling petitioner to have only 50% of the gain taxed as a long-term capital gain.

RULING

The Supreme Court affirmed the CTA’s denial of the refund. The legal logic is anchored on statutory interpretation and procedural rules. First, the Court refused to entertain petitioner’s new argument on appeal regarding the recalculation of profit by deducting alleged business liabilities. This issue was not raised before the CTA, and a party cannot change its theory on appeal, as doing so would prejudice the adverse party and violate procedural rules.
On the substantive tax issue, the Court held the sale was not of a single capital asset but of the individual assets comprising the business. Section 34(a)(1) of the National Internal Revenue Code, defining “capital assets,” explicitly excludes inventory, property held primarily for sale, and depreciable property used in trade or business. Following the U.S. precedent in Williams v. McGowan, which interpreted an identical provision, the Court ruled that a going business must be “comminuted into its fragments” for tax purposes. Each asset must be tested against the statutory definition.
Since the bakery’s assets included non-capital assets like inventory and depreciable property, the entire business could not be treated as a single capital asset. Petitioner failed to meet his burden of proof by not allocating the P100,000.00 selling price to each specific asset to distinguish capital from ordinary gains. The Court also rejected the argument that the entire profit stemmed from goodwill (a capital asset), noting the CTA’s factual finding, supported by evidence, that goodwill was sold at its acquisition cost. Therefore, without proper allocation, the tax liability could not be recomputed, and the refund claim was correctly denied.