Tax Case Digest: China Banking Corp. v. CA

China Banking Corp. v. CA
G.R. No. 125508  July 19, 2000
VITUG, J.

Lessons Applicable: Capital asset, capital loss, inventory depends on the nature of the business

Laws Applicable:

FACTS:

• Petitioner China Bank made a 53% equity investment in First CBC Capital (Asia) Ltd., a Hongkong Subsidiary of P 16,227, 851.80
• 1906: with the approval of the Bangko Sentral, it wrote of as worthless investment for being insolvent in its 1987 Income Tax Return treated as bad debts o ordinary loss deductible. 
• CIR contends it should be capital loss.  
• CTA and CA on Petition for Review on Certiorari: upheld CIR contention

ISSUE: W/N Capital loss (NOT Ordinary Loss)

HELD: Yes. Petition is DENIED

• Equity investment is a capital asset resulting in a capital gain or a capital loss. A capital asset is defined negatively in Section 33(1) of the NIRC
• (1) Capital assets. - The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include: 
• stock in trade of the taxpayer; or 
• other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or 
• property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or 
• property used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of section twenty-nine; or
• real property used in the trade or business of the taxpayer
• Thus, shares of stock; like the other securities defined in Section 20(t)[4] of the NIRC, would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities. 
• Section 20(u) of the NIRC defines a dealer in securities thus" (u) The term 'dealer in securities' means a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom."  
• In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets. 
• Loss sustained by the holder of the securities, which are capital assets (to him), is to be treated as a capital loss as if incurred from a sale or exchange transaction. A capital gain or a capital loss normally requires the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become worthless, there is strictly no sale or exchange but the law deems the loss anyway to be "a loss from the sale or exchange of capital assets
• Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the sale or exchange of capital assets, and not from any other income of the taxpayer.