BIR Ruling [DA-024-01]

February 26, 2001 BIR RULING [DA-024-01] 27 (D) (5); 39 (A) (1) DA-397-2000; VAT Ruling No. 27-96 Martinez Leyba, Inc . Rm. 307 Maritima Building, 117 Dasmarias St., Manila P.O. Box 805 Attention: Mr . Nestor B . Quesada Administrator Gentlemen : This refers to your letter dated January 10, 2000 requesting for a ruling on whether or not the real property (land and building), owned by Martinez Leyba, Inc., a licensed real estate dealer, being offered then for lease but which building had already been demolished is considered a capital asset considering that the Company has been compelled by the Government to cease from its business operation on that particular property through expropriation/acquisition of the same for public purpose. It is represented that Martinez Leyba, Inc. is a domestic corporation primarily engaged in business as land developer and real estate dealer; that said corporation owns a lot covered by TCT No. 240662 located at Evangelista corner C.M. Recto Streets in Manila, consisting of 995 sq. m. with a two-storey building which was later on demolished; that said property was then being offered for lease to the public; that on or about 17 August 1998, said corporation was informed in writing that per survey conducted in connection with the proposed LRT Line-Two Project, the subject lot and building came within the area of the project; that after more than one month, on September 25, 1998, subject corporation was formally notified through a letter dated September 25, 1998 by LRT that indeed, the said lot and building were to be expropriated and the building to be demolished upon issuance of a permit by the City of Manila before the delivery to the LRT; that in October, 1998, the Board of Directors of the Martinez Leyba, Inc., in a Special Board Meeting, passed a resolution approving and directing (a) the President to take appropriate action on the expropriation, toward the effective transfer of said lot and building to the LRT; (b) the Chief, Accounting Department, to make necessary steps, to have the subject lot and building be delisted in the corporation's inventory of properties that produced rental income; and inform the B.I.R. of the expropriation and the delisting in its said inventory; and (c) the Building Administrator, to inform the different tenants about the said expropriation and the termination of the tenancy contract and requesting them to vacate the building as soon as possible; that in view thereof, said building was abandoned by the tenants and remained idle until you were reliably informed that appropriation/budget is now being worked out for the payment of the whole amount anytime during this calendar year. 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 Company had already been abandoned by the tenants and has remained idle from the time that you were informed that it would be expropriated by the Government in connection with the LRT Line Two Project, and was already delisted from the company's inventory when you were notified by the LRT that it would be expropriated and was consequently demolished to give way to the said project, the income derived from the expropriation 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 Tax Code, based on the gross selling price or FMV as determined in accordance with Section 6(E) of the Code, whichever is higher. Furthermore, the gross receipts derived from the sale of the same is not subject to VAT, the said sale being involuntary and forced upon only on the seller by virtue of the exercise of the government's power of eminent domain and therefore it cannot be said to have been conducted in the course of the taxpayer's trade or business. (BIR Ruling No. DA-397-2000 dated November 20, 2000 and VAT Ruling No. 27-96 dated September 23, 1996) SIDEaA 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.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group