Garden of Memories Memorial Park and Chapels, Inc.

January 31, 2007 BIR RULING [DA-047-07] 27 (D) (5); R.R. 7-2003; 196; DA 219-05; DA 201-06 Garden of Memories Memorial Park and Chapels, Inc. Calzadang Bago, Pateros Metro Manila Attention: Engr. Tomas S. Sanchez, Jr. President Gentlemen : This refers to your letter dated January 8, 2007 requesting confirmation of your opinion that the proposed sale by your company, Garden of Memories Memorial Park and Chapels, Inc. (GMMPCI), of a parcel of land located at Bo. Ususan, Taguig City, shall be subject to the 6% capital gains tax (CGT) provided under Section 27 (D) (5) of the National Internal Revenue Code, as amended (Tax Code), and shall not be subject to the 12% value-added tax (VAT). You also request confirmation that said sale of the property shall be subject to documentary stamp tax (DST) imposed under Section 196 of the same Tax Code, as amended. cIHDaE It is represented that GMMPCI is a corporation duly organized and existing under Philippine law, and duly registered as such with the Philippine Securities and Exchange Commission; that GMMPCI was formerly known as the Garden of Memories Memorial Park and Life Plan, Inc., and that its principal business address is at Calzadang Bago, Pateros, Metro Manila; that GMMPCI's business is primarily to develop and sell cemetery plots in connection with the cemetery business and to develop and sell funeral plans and arrangements for funeral or memorial services; that the company's acquisition of land was solely for the purpose of developing them into a cemetery and consequently further its business of providing funeral and memorial services. It is further represented that sometime in November 1993, the company acquired a parcel of vacant lot located at Bo. Ususan, Taguig, Metro Manila, with a total area of 7,963 square meters. Said parcel of land (covered by Transfer Certificate of Title No. 20803 issued by the Register of Deeds for the Province of Rizal) was classified, and still is presently classified as, residential land for local tax purposes, although its acquisition in 1993 was in anticipation of future expansion of the company's memorial park and funeral services businesses. However, after 13 years, the said parcel of land has remained idle, vacant and undeveloped as the company sees no further need for its development. Furthermore, the company's books and audited financial statements as of December 31, 2005 shows the said parcel of land as "investment property" in accordance with Generally Accepted Accounting Principles (GAAP). aEIcHA On the basis of the foregoing representations, you request for a confirmation of your opinion that: 1. The company's sale of the above-described parcel of land, it being a capital asset, shall be subject to the 6% capital gains tax (CGT); 2. The sale is not subject to the 12% value-added tax (VAT) since the property is not primarily held for sale or for lease in the ordinary course of GMMPCI's business; and, 3. The sale of the property shall be subject to documentary stamp tax (DST) imposed under Section 196 of the same Tax Code, as amended. In reply, please be informed that this Office confirms your opinion that the proposed sale of the above-described parcel of land by GMMPCI shall be subject to the 6% capital gains tax (CGT) and to documentary stamp tax (DST) imposed under Section 196 of the Tax Code, as amended. However, the sale is not subject to the 12% value-added tax (VAT) considering that the subject property is not primarily held for sale or for lease in the ordinary course of trade or business of GMMPCI. The sale of the land shall be subject to the 6% capital gains tax (CGT) The proposed sale of the above-described parcel of land by GMMPCI is a sale of capital asset subject to the 6% capital gains tax (CGT) pursuant to Section 27 (D) (5) of the Tax Code, as amended, which provides: cADSCT "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." The term "capital asset" is negatively defined in Section 39 (A) (1) of the Tax Code, as: ". . . property held by the taxpayer (whether or not connected with his trade of 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." Thus, where property has remained undeveloped, idle and vacant, does not form part of the inventory of the taxpayer for sale or lease to customers, not actually used in business, and is aptly recorded as investment property in the corporate books, this Office has consistently ruled that the same shall be considered as capital asset and the gain presumed to have been realized from its sale will be subject to the CGT when sold. (BIR Rulings DA-163-05 dated April 14, 2005, DA-040-03, DA-008-04 dated January 6, 2004, DA-152-04, DA-270-04 dated May 17, 2004, DA-155-05 dated April 14, 2005, DA-219-05 dated May 5, 2005) EHTCAa It is noted, however, that under Revenue Regulations (RR) No. 07-03, all real properties acquired by a taxpayer that is habitually engaged in the real estate business shall be considered ordinary assets. Sec. 2, pars. (d), (e) and (f) of RR No. 7-2003, defines the persons engaged in the real estate business, as follows: "d. Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate. "e. Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale or lease. "f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent." Based on the above definitions, GMMPCI is a company not habitually engaged in the real estate business. It is primarily engaged in cemetery operations and the provision of funeral and memorial services, and its acquisition and development of land has merely been in connection with said core business. Moreover, as you mentioned, the subject property has, from the time of its acquisition, remained idle, vacant and undeveloped, and was never used in the conduct of GMMPCI's cemetery business or in the provision of funeral or memorial services. In BIR Ruling DA-201-06 dated April 3, 2006 , the BIR held thus: DHACES ". . . Considering that RS is not real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to carry on its agricultural business, the parcels of land to be sold by RS are not stock in trade or other real property of a kind which would properly be included in RS' 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). Furthermore, in BIR Ruling No. 014-03 dated October 28, 2003, it was ruled that for a property to be considered an ordinary asset, it must be actually used in the business of the corporation . The BIR stated that on the condition that the taxpayer concerned was not habitually engaged in the real estate business, the property not actually used in the business of the taxpayer, the same having remained idle and undeveloped, was considered a capital asset . . . ." (emphasis supplied) The sale of the land not primarily held for sale or for lease in the ordinary course of GMMPCI's business is not subject to the 12% value-added tax (VAT) Under Section 109 (p) of the Tax Code, as amended, 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. ( BIR Ruling DA-201-06 dated April 3, 2006, DA-270-04 dated May 17, 2004, DA-008-04 dated January 6, 2004 ) Given your representation that the subject parcel of land is neither held by GMMPCI primarily for sale to customers nor for lease, the sale of said property shall not be subject to VAT. The sale of the property is subject to documentary stamp tax (DST) imposed under Section 196 of the Tax Code, as amended Finally, the deed of sale conveying the above-mentioned parcel 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. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service