Pedro Manalo, a Filipino citizen residing in Makati City, owns a vacation house and lot in San Francisco, California, U.S.A, which he acquired in 2000 for P15 million. On January 10, 2006, he sold said real property to Juan Mayaman, another Filipino citizen residing in Quezon City, for P20 million. On February 9, 2006, Manalo filed the capital gains tax return and paid P1.2 million representing 6% capital gains tax. Since Manalo did not derive any ordinary income, no income tax return was filed by him for 2006. After the tax audit conducted in 2007, the BIR officer assessed Manalo for deficiency income tax computed as follows: P5 million (P20 million less P15 million) x 35% = P1.75 million, without the capital gains tax paid being allowed as tax credit. Manalo consulted a real estate broker who said that the P1.2 million capital gains tax should be credited from the P1.75 million deficiency income tax.
a) Is the BIR officer’s tax assessment correct? Explain. (3%)
b) If you were hired by Manalo as his tax consultant, what advice would you give him to protect his interest? Explain. (3%)
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