BIR Ruling [DA-009-02]

January 28, 2002 BIR RULING [DA-009-02] 27 (D) (5); 39 (A) (1) DA-397-2000; DA-024-2001 Ocampo & Ocampo 11th Floor, Equitable Bank Tower, 8751 Paseo de Roxas, 1226 Makati City Attention: Atty . Miguelito V . Ocampo Partner Gentlemen : This refers to your letter dated October 17, 2001 requesting for confirmation of your opinion that the sale of the real property of your client, Reddee Developers, Inc., will be subject to the capital gains tax pursuant to Sec. 27(D)(5) of the Tax Code of 1997. Based on your representations, as well as the documents submitted, the facts are as follows: 1. Reddee Developers, Inc. ("Reddee") is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines on January 25, 1980 and was primarily engaged in the manufacturing business. 2. On October 23, 1981, Articles of Incorporation of Reddee was amended by changing the primary purpose into that of a condominium developer. 3. As part of the Reddee's maiden project, a parcel of land with a residential house located in Pasay City and covered by TCT No. 48409 ("the Property") was purchased on March 4, 1982 for the purpose of developing the same into a high-rise condominium. 4. However, Reddee never undertook any development on the Property as no high-rise condominium was ever built thereon. Neither did Reddee construct any other improvements on the Property. 5. Reddee never entered into a single sale or transaction for profit with respect to the said Property, neither the land nor the residential house were ever leased to any party. 6. Reddee continued to pay the real estate taxes on the land and the residential house without deriving any benefit from the said properties. 7. No income was ever derived from the Property, i.e. it was never leased to any party and was never part of Reddee's inventory producing income. In fact, the Property has been idle from the time it was purchased in 1982 . 8. Reddee, likewise, has never actually engaged in the real estate business as it never undertook any construction project whatsoever nor did it ever engage in advertising, promotions or any activity for the purpose of soliciting buyers or lessees for the said Property. 9. Reddee never owned any other piece of real property and for all intents and purposes, Reddee remained a holding company without any active operation from the time it was incorporated up to the present time. In reality, Reddee has been non-operational since its incorporation up to the present. 10. Currently, the board of directors of Reddee is contemplating on selling the aforementioned real property. In support of your request, you submitted the following: (1) Reddee's Corporate Secretary's Certificate; (2) Affidavit to the effect that Reddee has not undertaken any operation for the years 1988, 1989, 1990, 1992, 1993, 1994. 1995, 1996, 1997, 1998, 1999 and 2000; (3) Balance Sheets of Reddee for the years 1998, 1999 and 2000; and (4) Annual Income Tax Return of Reddee for the years 1998, 1999 and 2000. In reply, please be informed that the term "capital assets" as negatively defined in Section 39(A)(1) of the Tax Code of 1997, 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 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. In view of the foregoing; and inasmuch as Reddee has remained a holding company without any active operation from the time of its incorporation up to the present, and that the subject property of Reddee has remained idle from the time it was purchased in 1992 and was never leased to any party nor did it ever become part of Reddee's income producing inventory, the said Property is considered as capital asset. Consequently, the income that will be derived from the sale thereof is not subject to the expanded withholding tax under Section 3 (J) of Revenue Regulations No. 6-2001 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 same Code, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Code. whichever is higher. (BIR Ruling No. DA-397-2000 dated November 20, 2000 and DA-024-2001 dated February 26, 2001) 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group