Commercial Motors Corporation

January 24, 2008 BIR RULING [DA-038-08] 27 (D) (5); 39 (A) (1); DA-620-2006 Commercial Motors Corporation Mercedez Avenue, Brgy. San Miguel Pasig City Attention: Timothy C. Lee President Gentlemen : This refers to your letter dated January 7, 2008 requesting for confirmation of your opinion that the sale of your company's idle real properties and not used in business should be classified as a capital asset and, therefore, subject to the 6% capital gains tax and 1.5% documentary stamp tax but exempt from the 12% value-added tax. The facts, as represented, are as follows: COMMERCIAL MOTORS CORPORATION ( "CMC", for brevity ) is a domestic corporation duly registered with the Securities and Exchange Commission engaged in the business of manufacturing, assembling, importing, exporting, converting, buying, leasing, selling, licensing and distributing automobiles and other forms of mechanically propelled conveyances and all supplies, materials, parts and accessories connected therewith. CMC is the registered owner of three (3) parcels of land located in Barangay San Miguel, Pasig City covered by Transfer Certificates of Title (TCTs) Nos. 479540, PT-124516 and PT-124517 issued by the Registry of Deeds for Pasig City containing an area of 3,177 square meters; 3,368 square meters and 10,020 square meters, respectively. The said properties have never been used by CMC in its trade or business, nor subjected to depreciation, nor held primarily for sale or lease to customers in the ordinary course of business, and never been offered for rent or actually leased to anybody since their acquisition. It did not derive any income from the said properties and the financial restructuring package of CMC called for the sale of the said idle properties to any interested buyer. SIEHcA In reply thereto, please be informed that Section 27 (D) (5) of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 7-2003, provides "(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. 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 this Code, whichever is higher, of such lands and/or buildings." It is undisputed that the yardstick for determining whether the property is capital asset or ordinary asset is the actual use of the said property. Thus, if the property is not actually used in trade or business of the taxpayer, whether or not connected with his trade or business, or not held for lease or sale to customers, it will be classified as a capital asset. Moreover, if the property is merely held for investment purposes and remains vacant and idle, it is deemed a capital asset. This is fortified in BIR Ruling No. 014-2003 dated October 28, 2003, where this Office ruled that "It is apparent under the foregoing provision that for a property to be considered an ordinary asset it must be actually used in the business of the corporation. Accordingly, on the condition that Wendell Holdings Co., Inc. is not habitually engaged in the real estate business as represented, the property under consideration is a capital asset. The property was neither held primarily for sale to customers nor actually used in the business of Wendell Holdings Co., Inc. . . . The property is not actually used in the business of Wendell Holdings Co., Inc. as it has remained idle and undeveloped. Therefore, the sale of the property under consideration is a sale of a capital asset, not an ordinary asset. As such, the transaction is subject to capital gains tax of 6% under Section 27(D)(5) and not to the creditable withholding tax." The phrase "taxpayers engaged in the real estate business" refers collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayer not engaged in the real estate business" shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of these Regulations. (Sec. 2 (g), Revenue Regulations ["RR"] No. 7-2003) DSEIcT Considering that CMC is not a real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to engage in car assembling/distributing business, the parcels of land to be sold by CMC are not stocks in trade or other real property of a kind which would properly be included in CMC's inventory if on hand at the close of the taxable year. Nor are they real property held primarily for sale or lease to customers in the ordinary course of trade or business. (BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003). In view of the foregoing, it is the considered opinion of this Office that the income to be derived by CMC from the sale of the above-mentioned parcels of land is not subject to the creditable/expanded withholding tax under Section 2.57.2 (J) of RR 2-98, as last amended by RR 30-2003, but to the capital gains tax of six percent (6%) based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the Tax Code of 1997, as amended by Republic Act ("RA") No. 9337, whichever is higher, of such parcels of land pursuant to Section 27 (D) (5) of the same Code. Moreover, under Section 109 (p) of the Tax Code, as amended by RA 9337, the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business shall be exempt from VAT. Considering that CMC is primarily engaged in the business of manufacturing, assembling, importing, exporting, converting, buying, leasing, selling, licensing and distributing automobiles and any all other forms of mechanically propelled conveyances and all supplies, materials, parts and accessories connected therewith, the above-mentioned parcels of land are not being held by CMC primarily for sale to customers or held for lease in the ordinary course of trade or business. The sale by CMC of the parcels of land shall be exempt from VAT. (BIR Ruling Nos. DA-130-A-2003 dated April 25, 2003 and VAT Ruling No. 034-2001 dated June 13, 2001). Finally, the deed of sale conveying the above-mentioned parcels of land shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, 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. DHSaCA This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, however, it is disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service