Amending Certain Provisions of Ordinance No. 24, Series of 1995, Entitled, "An Ordinance Amending Tax Ordinance No. 3, Series of 1976"

November 20, 2009 BIR RULING [DA-(C-275) 690-09] 39 (A) (1), RR 4-2007; DA (C-105) 323-2009; DA (C-052) 185-2009; DA (C-022) 104-2008; DA-665-06; DA-163-2005; 234-92; 014-2003 F & L Realty and Development Corporation 2205-46, 5th Floor Castillo Bldg. EDSA cor. Aurora Blvd. Pasay City Attention: Mr. Gregorio D. Castillo President Gentlemen : This refers to your letter dated November 6, 2009 stating that F&L Realty and Development Corporation (F&L for brevity) is the registered owner of seven (7) contiguous parcels of land covered by TCT Nos. 76423, 76424, 76425, 76426, 76427, 76428 and 76429 of the Registry of Deeds for Paraaque City. The properties are situated along Dr. A. Santos Ave., Paraaque City containing an aggregate area of 9,257 square meters. F&L is a close family corporation and the above-mentioned lots were acquired by the parents of its shareholders in the year 1988, and for about 20 years, the said parcels of land remained idle, neither leased nor improved for commercial purposes and not used in its leasing business up to the time the same were sold in the year 2007. The subject properties were purchased for investment purposes and titled in the name of F&L and were not classified as part of F&L's inventories nor held for lease or primarily held for sale in the usual course of its business. They are identified in their books as idle lots or "Non-Income Producing Properties". When the properties were sold and eventually was issued the corresponding clearance for transfer of ownership to the buyer, the Revenue District Officer of Paraaque, Atty. Alejandro T. Polca, under whose jurisdiction the properties were located, certified that the same have no improvement for commercial purposes and upon due evaluation, verified that such parcels of land are properly classified as a capital asset, and approved the payment of the corresponding capital gains tax. Consequently, after payment of the final capital gains tax and DST, Certificate Authorizing Registration (CAR) dated April 18, 2007 was thereafter issued. The Office of the City Assessor of Paraaque has likewise issued a Certification dated September 12, 2006 that the foregoing properties have no improvement. The buyer had also executed a Sworn Declaration of No Improvement dated March 20, 2007 attesting to the fact that the parcels of land have no improvement at the time of sale. From the foregoing, you now request for an opinion that the above-stated properties can be properly classified a capital asset and as such exempt from the payment of expanded withholding tax and value-added tax (VAT). TAacCE In reply, please be informed that Section 39 (A) (1) of the 1997 Tax Code, as amended, defines capital assets, to wit: "SEC. 39. 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 the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer." As stated above, capital assets do not include 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 real property used in trade or business of the taxpayer. Considering that since the time of acquisition, the subject properties have never been used by F&L in the ordinary course of its business and have remained vacant, abandoned and idle, then the aforestated properties are rightfully classified as capital assets. On the other hand, Section 27 (D) (5) of the Tax Code of 1997, as amended, provides, viz. : "SEC. 27. Rates of Income Tax on Domestic Corporations. (D) Rates of Tax on Certain Passive Incomes. xxx xxx xxx (5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings." This rule applies, whether or not the seller-corporation is engaged in the real estate business. In BIR Ruling No. DA-248-08 dated April 17, 2008, this Office held that aSCHcA "Since the above-mentioned properties were actually undeveloped and not leased to third parties nor held for sale or used in trade or business and are not subject to depreciation, the income to be derived from the expropriation of the above-mentioned properties, are not subject to the expanded withholding tax under Sec. 2.57.2 (J) of Revenue Regulations No. 2-98, as amended, but only to the 6% capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the said Code, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1996, whichever is higher." The above ruling was issued by this Office on the basis of the discussions stated in BIR Ruling No. DA-560-06 dated September 19, 2006 which states as follows "However, when the real estate involved has never formed part of its inventory for sale to customers and has not been used in its trade or business as evidenced by the fact that it has remained idle, raw and undeveloped, such real properties are properly classified as capital assets subject to a final tax of 6% on the gain presumed to have been realized from the sale or transfer thereof, pursuant to Sections 27(D)(5) of the Tax Code of 1997. xxx xxx xxx Lots or improvements, classified as "investment properties", which are idle, unproductive and unimproved since the time of its acquisition, and do not fall under any of the assets enumerated under Section 39(A)(1) of the Tax Code of 1997 and 2(b) of Revenue Regulations No. 7-2003 are classified as capital assets, the sale of which is subject to 6% capital gains tax, DST of 1.5% but exempt from 10% VAT (BIR Ruling No. DA-152-04 dated March 31, 2004)." Furthermore, Sec. 14 (B) (p) (1) of Revenue Regulations (RR) No. 4-2007, amending Sec. 4.109-1 (B) (1) (p) of RR No. 16-2005, implementing Republic Act (RA) No. 9337, provides "(p) The following sales of real properties are exempt from VAT, namely: (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer's main business." ATESCc The term "primary" is defined as 'first, principal, chief, leading or first in order of time, or development, or intention' (Black's Law Dictionary, Sixth Edition). Thus, to be 'held primarily for sale or lease', the property must be held with the chief intention of being sold or leased. In VAT Ruling No. 012-02, it was held that the sale of properties of MGM Motor Trading, Inc. is not subject to VAT since the properties sold were neither primarily held for sale to customers nor for lease in the ordinary course of its trade or business. Also in BIR Ruling No. DA-665-06, dated November 14, 2006, the BIR has ruled that sale of real properties of Benson Realty & Development Corporation, which are not primarily held for sale to customers in the ordinary course of trade or business nor included as part of its inventory of property for lease, is not subject to the 12% VAT. Likewise, in DA-685-06, dated November 30, 2006, it was reiterated that the sale of real properties of Union Ajinomoto Realty Corporation, not being used in the ordinary course of its trade or business, is not subject to the 12% VAT. Finally, in BIR Ruling No. DA-420-05 dated October 10, 2005 (citing BIR Ruling DA-155-2005 dated April 14, 2005 and BIR Ruling DA 219-2005 dated May 5, 2005 among others), the BIR ruled that the subject realties of Union Ajinomoto Realty Corporation which have remained vacant, idle, unproductive and unimproved since the time of acquisition do not fall under any of the assets enumerated under Section 39 (A) (1) of the Tax Code of 1997 and Section 2 (b) of RR No. 7-2003 and are properly classified as capital assets; that the sale of the aforesaid properties which are classified as capital assets, is subject to capital gains tax at the rate of 6% on the gain presumed to have been realized from the sale or transfer; and that the sale of the said vacant and/or idle real properties, not being used in the ordinary course of the trade or business of UARC is not subject to the then 10% VAT. Accordingly, as the aforequoted properties under consideration were not primarily held for sale or for lease to customers nor were they actually used in the ordinary course of F&L's trade or business, neither were the subject properties been part of the stock in trade of F&L, nor were they subjected to depreciation and were never included in the latter's inventory, the sale thereof is indeed subject to the 6% final capital gains tax and to the 1.5% documentary stamp tax based on the gross selling price or fair market value of the property, whichever is higher, as determined in accordance with Sec. 6 (E) of the 1997 Tax Code, as amended. However, the sale is not subject to the expanded withholding tax or ordinary income tax, as well as the 12% VAT pursuant to Sec. 14 (B) (p) (1) of RR 4-2007, implementing RA No. 9337. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner (Legal Service)