### Facts:
Petitioners Tomas and Ursula Calasanz challenged the decision of the Court of Tax Appeals (CTA) and the assessment by the Commissioner of Internal Revenue regarding deficiency income tax and real estate dealer’s fixed tax for the year 1957. Ursula Calasanz inherited an agricultural land in Cainta, Rizal, which was then surveyed, subdivided, and improved to render it saleable. These lots, after subdivision and development, were sold to the public at a profit. In their 1958 income tax return, the petitioners reported 50% of the realized profit as taxable capital gains. However, upon audit, the Revenue Examiner classified them as engaged in the real estate business, prompting assessments for real estate dealer’s fixed tax and deficiency income tax on ordinary gain. The petitioners appealed to the CTA, which upheld the Commissioner’s decision except for a compromise penalty, leading to this appeal to the Supreme Court.
### Issues:
1. Whether the petitioners are liable as real estate dealers for the real estate dealer’s fixed tax.
2. Whether the gains from the sale of the subdivided lots are taxable as ordinary income or as capital gains.
### Court’s Decision:
The Supreme Court affirmed the decision of the CTA. It held that the petitioners were engaged in the real estate business, given the development activities and the number, continuity, and frequency of sales which resembled those of a traditional real estate business. The Court rejected the petitioners’ argument that the land was merely sold as part of an inheritance liquidation. It cited that property, once substantially improved or actively sold, can be considered as held primarily for sale to customers in the course of business, making its gains taxable as ordinary income.
### Doctrine:
1. The classification of assets into ordinary assets and capital assets depends on their use and the taxpayer’s activities concerning these assets. Improved and actively sold inherited property may be considered an ordinary asset if it demonstrates the characteristics of being held for sale in the ordinary course of business.
2. The purpose of liquidation does not automatically classify the sale of property as dealing with a capital asset; it must be assessed within the context of the taxpayer’s business activities.
### Class Notes:
– **Ordinary Assets vs. Capital Assets**: The classification hinges on the purpose for which the asset is held and activities undertaken with the asset.
– **Real Estate Dealer**: Defined by Section 194 of the National Internal Revenue Code, involves anyone engaged in selling, exchanging, leasing, or renting property on a significant scale.
– **Taxable Gains**: The tax treatment of gains from the sale of property differs based on whether the property is an ordinary asset or a capital asset, with ordinary assets being taxable in full as ordinary income.
### Historical Background:
This case exemplifies the complexities in differentiating between capital assets and ordinary assets in real estate transactions, reflecting the broader challenges in tax law concerning the categorization of business activities and the corresponding tax implications. It underscores the nuanced understanding required in applying tax codes to diverse scenarios in the real estate sector.
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