BIR Ruling [DA-009-03]

January 14, 2003 BIR RULING [DA-009-03] DOF Dept Order Nos. 16-98; 10-97 SGV & Co. 6760 Ayala Avenue Makati City 1227 Attention: Atty. E. C. Alcantara Tax Division Gentlemen : This has reference to your letter dated November 14, 2001 requesting for our opinion on the unresolved issue raised in your letter request dated June 12, 2000 but was not addressed in our Ruling No. DA-124-2001 dated July 18, 2001 relative to the correct basis for the computation of the capital gains tax in relation to the dacion en pago transaction involving Sucat Property executed by your client, Philippine Appliance Corporation ("PHILACOR"). In addition, you also request for a determination of whether the Sucat Property based on your representation is indeed a "capital asset": As previously represented in your letter request dated June 12, 2000, PHILACOR is a corporation engaged in the manufacture and distribution in the Philippines of General Electric, White Westinghouse, Hot Point, and Winner refrigerators and freezers, as well as other brands; that PHILACOR is the owner of 17 parcels of land with the frontage located at Dr. A. Santos Avenue, Paraaque; that this frontage has an area of 11,675 sq.m. whereas the total area of the 17 parcels of land is seventy five thousand six hundred thirty seven square meters (75,637), herein collectively known as the "Sucat Property" and under the following titles: cAHDES TCT No. Area in square meters 66632 3,238 66,633 3,165 66,634 3,075 66,635 2,925 66,636 3,073 66,637 3,067 66,638 3,063 66,639 5,351 66640 1,595 66,641 1,780 66642 1,525 66643 8,502 66644 1,565 44350 9,333 12,705 142171 271 142172 11,150 142174 254 Total 75,637 ====== that the above-mentioned property was originally the location of the plant site of PHILACOR until the plant was moved to Calamba, Laguna sometime in January 1999; that as previously represented, appropriate notices of this transfer were sent by PHILACOR to the offices of the Paraaque City Assistant Treasurer, Paraaque City Assistant Assessor, Paraaque BIR Revenue District Office and MERALCO; that from January 1999, when the plant was moved to Calamba, Laguna, until the present, the Sucat Property was since classified as "Other Assets" in the Financial Statement of the PHILACOR; that since the transfer of the operations of PHILACOR from the Sucat Property to Calamba Laguna, the Sucat Property has not been subjected to depreciation. It is further presented in your letter that in order to finance the construction of the Laguna plant, where the plant was transferred from the Sucat Property, long term commercial papers (LTCPs) in the amount of One Billion Pesos (Php1,000,000,000) were issued pursuant to the SEC Certificate of Registration No. LT-000207 to the following (collectively known as "LTCP Holders"): All Asia Capital; Bearer (AB Capital and Investment Corp.); Bearer (ABCIC-TID Various Accounts); Bearer (Asean Alliance Corporation); Bearer (Global Business Bank); Bearer (International Capital Corporation); Bearer (Phil. Commercial Capital, Inc.); BPI as Trustee for Various Trust Accounts; BPI Capital Corporation; FEB Investments, Inc.; First Metro Investment Corp.; Land Bank of the Phils.; PCIB as Trustee for Colgate Palmolive; PCIBank; RCBC Various Trust Accounts; and United Coconut Planters Bank. that sometime in May 30, 2000 and with its expected inability to pay due to continuing financial constraints, PHILACOR decided to fully discharge the above obligation by way of executing a dacion en pago over the Sucat Property in favor of the LTCP Holders. On the basis of the same, a documentary stamp tax in the amount of Fifteen Million Pesos (Php15,000,000.00) was paid and remitted to the BIR. Based on the following representations and documents, you now request for confirmation on the following: 1. The frontage of the Sucat Property, consisting of an area of 11,675 sq.m. are along Dr. A. Santos Avenue and thus has a zonal value of P30,000/sq.m. 2. Considering that the interior portion of the Sucat Property cannot be classified under any particular street/subdivision, the same shall be classified under "All Other Streets"; 3. The interior portion of the Sucat Property with a total area of 63,692 has a zonal value of P8,000/sq.m. under All Other Streets classification; 4. That considering that the Sucat Property i) is not used in trade or business nor leased out to tenants; ii) it does not form part of PHILACOR'S inventory; iii) it is not held for speculative purposes; and iv) it is not subject to depreciation, the same is indeed a "capital asset". In reply, please be advised that under BIR Ruling No. 114-99 dated July 29, 1999, this Office has already made a determination of the correct value of land for internal revenue tax purposes, where the depth of the lot is deeper than the standard depth of land. In such a case, it is an accepted principle that the area of lot beyond the standard depth is valued lower than the frontage area. This is because as the depth of lot increases, the unit value decreases. Accordingly, and pursuant to Section 201 of R.A. 7160 as well as Department Order No. 10-97 of the Department of Finance, this Office, in the said ruling, ruled as follows: "It is undisputed that the zonal value or fair market value of lots located along the Zapote Alabang Road is at P19,900.00. However, this Office recognizes that to extend such zonal valuation not only to the frontage area but to the rest of the Property would be inequitable and unjustified under the premises. According to the rules of valuation and under the abovequoted Department Order No. 10-97 [The Revised Zonal Values of Real Properties in Las Pias and Muntinlupa under Revenue District No. 53 for Internal Revenue Tax Purposes] and considering the guidelines in the valuation of urban lands, the following are in order [ sic ]: (a) Only lots located along the Alabang Zapote Road and vicinity (Ceciles R. Moonwalk) are valued at P19,900 for tax purposes; (b) If the area cannot be classified under any particular street/subdivision of vicinity, the area would be lumped under the "All Other Streets" category; (c) The valuation of lands under the "All Streets" category are as follows: i. Residential Residential P2,200 ii. Commercial Residential 3,700 iii. General Purpose 1,900 xxx xxx xxx Hence, since the frontage area would consist of 4,500 sq.m., 150 meters x 30 meters) applying the zonal value of P19,900, the fair market value of this particular portion is P85,000,000. The remaining property would be General Purpose lot with an assigned zonal value of P1,900 . . ." Accordingly, the zonal value or fair market value of lots located along Dr. A. Santos Avenue is P30,000/sq.m. However, this Office recognizes that to extend such zonal valuation not only to the frontage area but to the rest of the Property would be inequitable and unjustified under the premises. According to the rules of valuation under the above-quoted DOF Department Order No. 16-98 and considering the guidelines in the valuation of urban lands, the following are in order: The frontage of the Sucat Property, consisting of an area of 11,675 sq.m., are lots located along Dr. A. Santos Avenue and are valued at P30,000/sq.m. for tax purposes, and the interior portion of the Sucat Property with a total area of 63,962 sq.m. cannot be classified under any particular street/subdivision of vicinity, then said areas would be lumped under "All Other Streets" category, and are valued at P8,000/sq.m. for tax purposes. Finally, as negatively defined in Section 39(A)(1) of the Tax Code of 1997, 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. Considering that the Sucat property has not been used in trade or business since January 1999, and as such has been abandoned and treated as idle property, then the same may be considered a capital asset. Based on the foregoing we hereby confirm your opinion as follows: 1. The frontage of the Sucat Property, consisting of an area of 11,675 sq.m. are along Dr. A. Santos Avenue and thus has a zonal value of P30,000/sq.m.; 2. Considering that the interior portion of the Sucat Property cannot be classified under any particular street/subdivision, the same shall be classified under "All Other Streets"; 3. The interior portion of the Sucat Property with a total area of 63,692 has a zonal value of P8,000/sq.m.; 4. That considering that the Sucat Property i) has not been used in trade or business since January 1999, nor leased out to tenants; ii) it does not form part of PHILACOR'S inventory; iii) it is not held for speculative purposes; and iv) it is not subject to depreciation, the same may be treated a "capital asset". 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group