ANTONIO PORTA FERRER, PETITIONER, VS. (COLLECTOR) NOW COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

This is a petition to review the decision of the Court of Tax Appeals,
denying petitioner’s cliaim for refund against respondent.

The petitioner was the sole proprietor of the “La Suiza Bakery” on R.
Hidalgo, Quiapo, Manila. He owned this bakery from October 16, 1951 up to
September 15, 1955, when he sold the same to Juan Pons for the sum of
P100,000.00. The assets of the bakery consisted of accounts receivable, raw
materials, wrapping supplies, firewood, unexpired insurance, good-will,
machinery and equipment, and furniture and fixtures, with a total book value of
P74,321.91. In selling the bakery, petitioner spent P5,000.00 for broker’s
commission and P1,000.00 for accountant’s fee, or a total of P6,000.00.

After deducting the total book value of the assets and the incidental
expenses from the gross selling price, petitioner filed on February 14, 1956 his
income tax return, showing a net profit of P19,678.09 as having been realized
from the sale of the bakery. On the basis of this amount, he paid P2,439.00 as
income tax on February 15, 1956.

Petitioner later requested the respondent to refund to him the sum of
P2,030.00, claiming that the bakery was a capital asset which he had held for
more than twelve months 60 that the profit from its sale was a long term capital
gain, and therefore, only 50 per cent of it was taxable under the National
Internal Revenue Code. When no action was taken by respondent on his request,
petitioner filed a petition for refund in the Court of Tax Appeals.

The Tax Court held that the sale of the bakery did not constitute a sale of a
single asset but of individual assets, some of which were capital assets while
others were ordinary assets. But since petitioner failed to show what portion of
the selling price of the bakery was fairly attributable to each asset, the Tax
Court held that it could not ascertain the capital and/or ordinary gains taxes
properly payable upon the sale of the business. For this reason, it denied
petitioner’s claim for refund.

In his first assignment of error, the petitioner contends that the Tax Court
erred in holding that he had made a profit of P19,678.09 from the sale of the
bakery, upon which amount the income tax was based. The petitioner now claims
that the business had liabilities amounting to P19,183.01 which, if deducted
allong with the book value of the assets and the incidental expenses from the
selling price of P100,000.00, would show a profit of P495.05 only.

We agree with the contention of the respondent that the matter of computation
of profit cannot be taken up in this appeal because the same was neither raised
in the Tax Court nor made within the issues of the pleadings of the parties.
(Sec. 19, Rule 48, Rules of Court.) There, the only issues were whether the Tax
Court had jurisdiction over this case and whether or not the sale of the bakery
was a sale of capital asset or of individual assets comprising the business. The
rule is well settled that no question will be considered by the appellate court
which has not been raised in the court below. When a party deliberately adopts a
certain theory, and the case is tried and decided upon the theory in the court
below, he will not be permitted to change his theory on appeal, because to
permit him to do so would be unfair to the adverse party. (Northern Motors Inc.
vs. Prince Line, et al., 107 Phil., 258, citing Toribio vs. Decasa, 55 Phil.
461; San Agustin vs. Barrios, 68 PhilL 475; Molina vs. Somes, 24 Phil. 49; and
Agoncillo and Marino vs. Javier, 38 Phil. 424).

In his second assignment of error, petitioner contends that the sale of the
business known as “La Suiza Bakery” was a sale not of the individual assets
comprising the same but of an entire, single asset which, under the law, is a
capital asset.

Section 34 of the Tax Code provides in part:

“Capital gains and losses.—(a) Definitions.—

As used in this Title—

(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 allowance for
depreciation provided in subsection (f) of section thirty; or real
property used in the trade or business of the taxpayer.

* * *

(b) Percentage taken into account.—In the case of a taxpayer, other
than a corporation, only the following percentage of the gain or loss recognized
upon the sale shall be taken into account in computing net capital gain, net
capital loss, and net income.

(1) One hundred per centum if the capital asset has been held for not
more than twelve months;

(2) Fifty per centum, if the capital asset; has been held for more
than twelve months.

Parenthetically, it may be noted that tax rates are graduated upwards as the
total amount of income increases. But capital assets are generally held for a
period in excess of a year. When held for more than a year, the profit or loss
realized is reported for tax purposes only in the year that the asset was sold
or exchanged even though the increment might have developed over several years
or was the result of years of effort. Since the gain is taxed all in one year, a
higher rate of tax would necessarily be paid than if a part of the gain were
reported each year the asset was held. In an attempt to compensate for this,
only a percentage of the gain on such sales is required to be included;
similarly, only a limited amount of any loss can be deducted in the year in
which realized. (Alexander, Federal Tax Handbook 411, 1959 ed.)

The issue then is whether or not the sale of the La Suiza Bakery was a sale
of a capital asset so that the profits derived from the sate is taxable up to 50
per cent only, considering that petitioner owned it for more than twelve months,
or whether the business is to be comminuted into its component parts, each part
to be tested against the definition of a capital asset in the Tax Code.

We find that Section 34(a) (1) of our Tax Code is patterned after Section 117
(a) (1) of the U.S. Internal Revenue Code (26 USCA, Sec. 117 [a] [1]). In
interpreting this latter provision, the United States Circuit Court of Appeals
held in the leading case of Williams vs. McGowan, 152 F2d 570, 162 ALR 1036
thus—

“* * * We have to decide only whether upon the sale of a going business it is
to be comminuted into its fragments, and these are to be separately matched
against the definition in Section 117 (a) (1), or whether the whole business is
to be treated as if it were a single piece of property.

“Our law has been sparing in the creation of juristic entities; it has never,
for example, taken over the Roman ‘universitas facti’, and indeed for many years
it fumbled uncertainly with the concept of a corporation. One might have
supposed that partnership would have been an especially promising field in which
to raise up an entity, particularly since merchants have always kept their
accounts upon that basis. Yet there too our law resisted at the price of great
and continuing confusion; and even when it might be thought that a statute
admitted, if it did not demand, recognition of the firm as an entity, the old
concepts prevailed. Francis vs. McNeal, 228 US 695, 33 S Ct 701, 57 L. ed. 1029,
LRA 1915 E 706. And so, even though we might agree that under the influence of
the Uniform Partnership Act a partner’s interest in the firm should be treated
as indivisible, and for that reason a ‘capital asset’ within Section 117 (a)
(1), we should be chary about extending further so exotic a jural concept. Be
that as it may, in this instance the section itself furnishes the answer. It
starts in the broadest way by declaring that all ‘property’ is ‘capital asset’,
and then makes three exceptions. The first is ‘stock in trade . . . or other
property of a kind which would properly be included in the inventory’; next
comes ‘property held . . . primarily for sale to customers’; and finally
property ‘used in the trade or business of a character which is subject to . . .
allowance for depreciation.’ In the face of this language, although it may be
true that a ‘stock in trade,’ taken by itself should be treated as a
‘universitas facti’ by no possibility can a whole business be so treated; and
the same is true as to any property within the other exceptions. Congress
plainly did mean to communicate the elements of a business; plainly it did not
regard the whole as ‘capital assets.’ “

This ruling was cited with approval by the United States Supreme Court in
Watson vs. Commissioner, 345 U.S. 544, 97 L ed 1232.

In line with this ruling, We hold that the sale of the “La Suiza Bakery” was
a sale not of a single asset but of individual assets that made up the business.
And since petitioner failed to point out what part of the price he had received
coulkl be fairly attributed to each asset, the Tax Court correctly denied his
claim.

While agreeing with the Tax Court that the good-will of the business is a
capital asset, petitioner nevertheless contends that there is neither factual
nor legal basis for concluding that the good-will of the bakery which he had
acquired for P10,000.00 was sold at the same price. The petitioner states that
he sold the assets of the bakery at their stated book value and that whatever
amount of the selling price exceeded the total book value of the assets minus
the good-wild should be attributed to the latter alone. In short, it is urged
that whatever profit was made from the sale came solely from the bakery’s
good-will which the Tax Court held to be a capital asset, only 50 per cent of
which was taxable.

The Tax Court’s finding that the petitioner acquired and sold the good-will
of the bakery for the same amount is supported by evidence (Exhibit “4” of
respondent) which has not been rebutted. Indeed, it is inconceivable how a
business, which was heavily indebted as petitioner contends, can ever possess a
good-will that can command so high a price.

For this reason, We believe that any profit which the petitioner may have
gained in the sale must have come from the sale of the other assets of the
business which must have been sold for amounts other than their stated book
value. As the Tax Court held, in order to ascertain the capital and/or ordinary
gains taxes properly payable on the sale of a business, including its tangible
assets, it is incumbent upon the taxpayer to show not only the cost basis of
each asset, but also what portion of the selling price is fairly attributable to
each asset. (Cohen vs. Kelm, 119 F supp. 376.)

Wherefore, the decision of the Court of Tax Appeals is hereby affirmed, with
costs against the petitioner.

Bengzon, C. J., Bautista Angelo, Labrador, Paredes, Dizon, and
Makalintal, JJ., concur.
Concepcion and Barrera, JJ.,
concur in the result.