BIR Ruling [DA-010-02]

January 29, 2002 BIR RULING [DA-010-02] 27 (D) (5); 39 (A) (1) DA-397-2000; DA-024-2001 De Guzman & Celis Law Office Suite C, 15th Floor, Strata 2000 Building Emerald Avenue, Ortigas Center Pasig City Attention: Atty . F . G . De Guzman and Atty . Amalia E . Dionisio Gentlemen : This refers to your letter dated December 11, 2000 requesting for and in behalf of your client, TM Realty Development, Inc. (TM Realty) for a ruling on the tax consequence of the sale and transfer of its rights, title and interest on a certain real property covered by TCT No. 2786-R of the Registry of Deeds of San Juan, in favor of RRI Realty Development Corporation. We quote the pertinent portion of your request as follows: "TM Realty is a domestic corporation whose primary purpose is to acquire by purchase, lease, donation or otherwise, and to own, use, improve, develop, subdivide, sell, mortgage, exchange, lease, develop and hold, for investment or otherwise, real estate of all kinds, whether improve, manage or otherwise dispose of buildings, houses, apartments and other structures of whatever kind, together with their appurtenances . "TM Realty, is the registered owner of a parcel of land covered by TCT No. 2786-R located at Missouri Street, San Juan, Metro Manila with a total area of One Thousand Three Hundred One Square Meters (1,301 sq. m.). The said property had been idle and vacant and had not been used in the ordinary course of trade or business of the company. On October 24, 2000, the said property was sold in favor of RRI Realm Development Corp. "On November 8, 2000, our client paid the amount of P585,450.00 as documentary stamp tax and P2,341,800.00 as capital gains tax due on the above mentioned sale, with the BIR, San Juan . . . " that on November 12, 2001, you submitted another letter, the relevant portion of which is quoted thus: "We would like to reiterate that the said parcel of land is idle and vacant and had not been used in the ordinary trade or business of TM Realty. To substantiate that the same is a vacant lot, we attached . . . copy of the Certification issued by the Municipal Assessor of San Juan on November 9, 2000 certifying that the same has, no improvements . " . . . please note in the Audited Financial Statements (AFS) of TM Realty, for 1997, 1998, 1999 and 2000 (with ITR), . . . the said corporation is not engaged in buying and selling real property but only buys real estate to hold for investment purposes. The rental income from 1996-1998 were generated from the lease of its condominium units. "The Balance Sheet of the said AFS would show that from 1996, the amount of the real estate owned by the company, which is recorded at cost, goes up because it does not sell said properties, except for year 2000 when the subject parcel of land was sold. As will be noted in the Liabilities and Stockholders Equity for the year 2000, the balance of purchase price of the subject property of P18,259,100.00 was recorded as unearned income from sale of capital asset. This clearly shows the intention of TM Realty to hold the said property as such . "The schedule of taxes and license attached to the AFS, wherein real estate taxes paid by the corporation increase every year, will further prove that TM Realty only buys real properties, for investment purposes." We quote further your letter dated December 11, 2001 showing TM Realty's income from the sale of the said property and the acquisition cost thereof, to wit: "Selling Price P39,030,000.00 Less: Lot Acquisition Cost (2,600,000.00) Capital Costs of Land 50% share in LAST (292,725.00) w/ RRI Realty 50% share in CCT w/ RRI Realty (1,170,900.00) Income from Sale P 34,966,375.00* ============ *Booked in year 2000 Audited Financial Statements, as follows: Retained Earnings 16,707,275.00 Unearned Income on sale of Capital Asset 18,259,100.00 Total P34,966,375.00 ============ "The investment in real estate as reflected in the Balance Sheet of the said Corporation for the years 1999 and 2000 is itemized as follows: Balance Sheet Investment (Real Estate) 1999 Balance P 5,733,436.94 Add: Capitalized taxes on Missouri sale 1,463,625.00 Capitalized surveying Cost of Tagaytay lot 25,000.00 Less: Cost of Missouri Land (P2,600,000 + P1,463,625) (4,063,625.00) year 2000 Balance P3,158,436.94 ============ "Please take note also that as shown in the Audited Financial Statements from 1996 to 1999, which we earlier submitted to you, the subject parcel of land was consistently booked as investment, which is being treated in the same manner as its PLDT stock investment. The said parcel of land was not bought for development, and that our client had no intention of developing the said parcel of land." Based on the foregoing, you now request for a confirmation of your opinion that pursuant to Section 27(D)(5) and 39(A)(1) of the Tax Code of 1997, the subject parcel of land which was sold by your client is classified as a capital asset and is therefore subject to capital gains tax. Likewise, the BIR Revenue District Officer of San Juan, Metro Manila will issue the necessary Certificate Authorizing Registration (CAR) for the registration of the title of the abovementioned parcel of land in the name RRI Realty Development Corp. upon presentation of proof of payment of the capital gains and documentary stamp taxes due on the said sale. 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 the aforementioned property of your client had already been idle and vacant since April 1989 and had not been used in the ordinary course of trade or business nor had it ever been classified as a property of a kind which would properly be included in the inventory if on hand at the close of the taxable year nor had it ever been held by the taxpayer primarily for sale to customer in the ordinary course of trade or business, the income derived from the sale thereof is not subject to the expanded withholding tax under Section 2.57.2(J) of Revenue Regulations No. 2-98, 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 Tax Code, based on the gross selling price or FMV as determined in accordance with Section 6(E) of the Code, whichever is higher. 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 and Inspection Group