GR L 3730; (April, 1952) (Digest)
G.R. No. L-3730; April 25, 1952
Enrique Roxas Argellies, plaintiff-appellee, vs. Bibiano L. Meer, Collector of Internal Revenue, defendant-appellant.
FACTS
Enrique Roxas Argellies, a Spaniard born in the Philippines but residing in France since infancy, inherited a lot with buildings on Echague Street, Manila, in 1930. The property was administered by Ayala y Cia., a local firm, which handled leasing, rent collection, and remittance of net proceeds to Argellies. In 1942, the buildings were destroyed by fire, and post-war, the American Army occupied the land, paying compensation. Lacking funds for reconstruction, Argellies sold the lot through Ayala y Cia., realizing a net profit of P74,899.77. Believing this to be a capital gain, Argellies declared one-half of the amount in his income tax return. The Collector of Internal Revenue, contending it was ordinary profit, assessed and collected an additional tax of P30,944.97. Argellies paid under protest and filed an action for refund.
ISSUE
Whether the profit from the sale of the land constitutes a capital gain, which hinges on whether Argellies was engaged in the trade or business of leasing real estate, as real property used in trade or business is excluded from the definition of capital assets under the tax law.
RULING
The Supreme Court affirmed the lower court’s decision, ordering a refund. It held that Argellies was not engaged in the business of leasing real estate. He resided abroad, delegated all management activities (leasing, rent collection, administration) to Ayala y Cia., did not execute leases, approve alterations, reinvest rents locally, or maintain an office. Merely owning property and receiving income through an agent, without active participation in management, constitutes passive ownership, not engaging in business. The Court cited persuasive precedent, including a New York case distinguishing passive investors from active business operators. Therefore, the property was not used in trade or business, the profit was a capital gain, and the additional tax was unduly collected.