BIR Ruling [DA-060-03]

March 3, 2003 BIR RULING [DA-060-03] S. 27 (D) (5) DA-010-02/1-29-02 DA-040-2003/2-10-03 Anaped Estate, Inc. 402 E. Rodriguez Avenue, Cubao Quezon City Attention: Rodrigo C. Reyes President Gentlemen : This refers to your letter dated December 23, 2002 requesting for a confirmation of your opinion that the parcels of land owned and registered under the name of ANAPED ESTATE, INC. (AEI for brevity) situated in the Barrio of Tunasan, Municipality of Muntinlupa (Properties for brevity) are capital assets, the sale of which are subject to the capital gains tax under Section 27(D)(5) of the Tax Code. The facts and circumstances, as you represent, are as follows: AEI is a corporation duly organized and existing under and by virtue of the laws of the Philippines. It was duly registered with the Securities and Exchange Commission on February 5, 1971. Its primary purpose, under the Article of Incorporation, is as follows: "a) To deal and engage in real estate business in all its branches and ramifications; to acquire, purchase, hold, administer, manage, sell, convey, mortgage, encumber, rent, lease or otherwise dispose of, for itself or for others, for profit or advantage, residential, commercial, rural, or other kinds of real property, developed or undeveloped, to such persons or entities and under such terms and conditions as the corporation may deem proper and convenient; . . ." In 1987, AEI acquired the said properties for investment purposes. However, in 1988, the Board of Directors decided to cease its operations and altogether discontinue its business due to financial difficulties. The said properties are recorded in the books of AEI under the account of Other Assets. The properties have been idle for more than sixteen (16) years now and AEI has not introduced any improvements on the said properties as evidenced by a certified copy of the financial statements submitted to the SEC in 1987, showing that AEI did not include as part of its inventory the said properties nor did it derive any rental income at all, and an Affidavit of No Transaction by AEI attesting to the fact that the said properties have been idle for more than sixteen (16) years and AEI has not introduced any improvements on the said properties. The City Government of Muntinlupa, Metro Manila and AEI were negotiating for the sale of the said properties prior to its intended expropriation. The sale was subsequently consummated on February 8, 2003 as evidenced by a Deed of Sale. In reply, please be informed that in BIR Ruling No. DA-010-02 dated January 29, 2002 wherein the subject property sold by a realty corporation was classified as a capital asset, this Office opined that: "In reply, please be informed that the term "capital asset" as negatively defined in Section 39(A)(1) of the Tax Code of 1997, means property held by the taxpayer (whether on 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. 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 trace 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." (Emphasis supplied.) This opinion was reiterated in the most recent ruling by this Office, which stated that: TcEDHa " The undeveloped lots , which ALC seeks to convey to its creditor-banks by way of a dacion en pago , are idle and unproductive lands of a real estate developer not primarily held for sale to its customers in the ordinary course of its business . Thus, the same are properly classified and taxed as capital assets pursuant to Sections 27(D)(5) and 39(A)(1) of the Tax Code of 1997" (BIR Ruling No. DA-040-2003 dated February 10, 2003) (Emphasis supplied.) Considering that the properties involved were recorded in the books of AEI under the account of Other Assets; that the properties have been idle for more than sixteen (16) years now; that AEI has not introduced any improvements on the said properties; that AEI did not include as part of its inventory the said properties nor did it derive any rental income at all, it is the considered opinion of this Office that the said properties are considered capital assets. As such, the sale of the said properties shall be subject to the capital gains tax under Section 27(D)(5) of the Tax Code, which provides that: "SEC. 27. Rates of Income Tax on Domestic Corporations . xxx xxx xxx (D) Rates of Tax on Certain Passive Incomes . xxx xxx xxx (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 which Section 6(E) of this Code, whichever is higher , of such lands and/or buildings." (Emphasis supplied.) It should be emphasized, however, that in light of the promulgation of Revenue Regulations No. 7-2003 (RR 7-2003 for brevity), which takes effect on February 28, 2003, real properties initially acquired by a taxpayer engaged in the real estate business shall not result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle. [Section 3(e), RR 7-2003] Thus, its sale shall be subject to the creditable withholding tax (expanded) under Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended, and consequently to the ordinary income tax under Section 27(A) of the 1997 Tax Code. [Section 4(c)(ii), RR 7-2003] This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group