BIR Ruling [DA-003-03]

January 1, 2003 BIR RULING [DA-003-03] 57; DA-81-00; 59-99 City and Development Corporation 2/F & 3/F, Cityland Condominium 10 Tower 1 6815 H.V. Dela Costa St. Ayala Ave. North, Makati City Attention: Mr. Rudy Go VP-FMSD Gentlemen : This refers to your letter dated November 7, 2000 requesting for a ruling to the effect that the real estate properties whether developed or undeveloped of the Cityland Group of Companies shall be considered as ordinary assets and the sale thereof even without an HLURB/HUDCC certification is subject only to the payment of the creditable withholding tax in accordance with Sec. 2.57.2(J) of Revenue Regulations (Rev. Regs.) No. 2-98, as amended by Rev. Regs. No. 6-2001. It is represented that Cityland Group of Companies consisting of Cityland Development Corporation (CDC), Cityland Incorporated (CI) and City and Land Developers, Inc. (CLDI), is primarily engaged in the development and sale of real estate properties such as condominium, townhouses, house and lot, duplex, subdivision lots, etc.; that while the corporations under Cityland Group of Companies are registered with Housing and Land Use Regulatory Board (HLURB) and Housing Urban Development Coordinating Council (HUDCC) as habitually engaged in real estate business, in addition to their registered projects for sale, they also have inventory of developed and undeveloped properties which are being sold from time to time on an as is where is basis and therefore; not covered by development permit and/or license to sell; that as it happens, the HLURB or HUDCC only certifies entities as registered with them provided the properties are covered by development permit and/or license to sell; that it is your opinion that while Sec. 2.57.2(J) of Revenue Regulations No. 2-98 requires registration of the seller/transferor with the HLURB or HUDCC to be considered as habitually engaged in the real estate business, the same should not be the sole criterion considering the primary purpose of Cityland Group of Companies as declared in their respective Articles of Incorporation and their regular business operations; and that Cityland Group of Companies' only source of income comes from real estate business and that they have more than six (6) transactions in a year, respectively. In reply, please be informed that pursuant to Section 27(D)(1) of the Tax Code of 1997, 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 the same Code, whichever is higher, of such lands and/or buildings. In this connection, Section 39(A)(1) of the Tax Code of 1997 defines "capital asset" as 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 property would 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 or business of the taxpayer. ( BIR Ruling No. 61-96 dated May 22, 1996 ) Moreover, the creditable withholding tax rates under Sec. 2.57.2(J) of Rev. Regs. No. 2-98 (then Rev. Regs. 6-85, as amended by Rev. Regs. 1-90 and further amended by Rev. Regs. 6-94 and 12-94), implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as amended" apply to sale or disposition of real properties by a taxpayer who is habitually engaged in the real estate business. Categorically, under Section 39 of the 1997 Tax Code, these properties held by a taxpayer primarily for sale in the ordinary course of business are considered as ordinary assets, the same being excluded in the definition of "capital asset." ADaSET While the regulations require membership in the HLURB or HUDCC to be considered as habitually engaged in the real estate business, the same should not be the sole criterion. For purposes of the above regulations, the term habitually engaged in the real estate business is not limited or restricted only to persons duly registered with the HLURB or HUDCC. The proviso simply means that any person duly accredited by the said government agencies shall be deemed habitually engaged in the real estate business. However, even in the absence of registration therewith, a person may also be treated habitually engaged in the real estate business upon showing that he is in fact actually engaged in the said business. Furthermore, then Rev. Regs. No. 12-94 merely requires submission of evidence showing that the taxpayer is in fact habitually engaged in the real estate business. ( BIR Ruling No. DA-081-2000 dated February 7, 2000, citing BIR Ruling No. 059-99 dated April 30, 1999 ) In view of the foregoing, this Office hereby holds that the aforementioned developed and undeveloped real properties included in the Cityland Group of Companies' inventory of properties which are being sold from time to time on an as is where is basis in the ordinary course of its trade or business and therefore not covered by development permit and/or license to sell, do not fall within the contemplation of the foregoing definition of the term "capital assets" rather the said inventory of properties are ordinary assets, the sale of which is subject to the creditable withholding tax prescribed under Revenue Regulations No. 2-98 as amended by Rev. Regs. No. 6-2000 implementing Section 57(B) of the Tax Code of 1997. Finally, the aforesaid sale or conveyance of the said real properties shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of the same Code, whichever is higher. ( BIR Ruling No. 61-96 dated May 22, 1996 ) 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 shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By. (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group