An option to defer taxation on a capital gain, even if irregular, is enforceable against the taxpayer
In 2007, a real estate investment company (SCI) entered into a lease-purchase agreement to acquire a property owned by its shareholders. In 2014, the company exercised the purchase option and acquired the building. In 2017, after the building was sold, the shareholders reported the capital gain on the property in their tax returns.
Following a tax audit of the company,administration issued a tax assessment against the partners, finding that the capital gain on the property was lower than the amount reported.
The taxpayers attempted to defend themselves by arguing that the capital gain should have been taxed at the time the purchase option was exercised, in 2014, because they had not indicated in the notarized deed of option exercise that they wished to benefit from the tax deferral regime under Article 93 quater of the General Tax Code. They therefore did not opt for the tax deferral.
The Court, after noting that the exercise of a purchase option under a lease agreement does not, as a matter of principle, give rise to a capital gain, states that it does result in a change in the company’s tax treatment. Indeed, prior to the exercise of the option, the company was taxed on income received from subleasing under the non-commercial profits regime. Since exercising the option causes the company to lease the property directly, its tax regime changes because it now falls under the property income category. This change in tax regime makes the capital gain immediately taxable; therefore, it was indeed subject to taxation in 2014 when the option was exercised.
However, the Court notes thatadministration may hold a taxpayer liable for the consequences of the tax regime he or she has chosen, even if he or she was not entitled to benefit from it.
It states that taxpayers, even if they did not complete the necessary formalities in the notarized deed to qualify for the capital gains tax deferral, filed an amended notarized deed in 2015 requesting the tax deferral. The company and the taxpayers also reported the capital gains on real estate as subject to tax deferral in their tax returns, particularly in the taxpayers’ 2017 tax returns.
The Court therefore finds that this option for deferring taxation, whether or not it is valid, may be enforced byadministration the taxpayer.
The Court has thus upheld the tax assessment of the capital gain on the property.
If you have a question about the procedures for a tax audit of a capital gain for an individual, please refer to our frequently asked questions on tax audits for individuals.