BIR Ruling [DA-076-03]

March 13, 2003 BIR RULING [DA-076-03] DOF Dept. Order #16-98; 10-97 DA-009-2003 dtd 01-14-2003 Triumvirate Development Corporation Security Trading Building 91 Sen. Gil J. Puyat Avenue Makati City Attention: Mr. Jose T. Ching President & General Manager Gentlemen : This refers to your letter dated July 18, 2002 stating that your company, a duly registered domestic corporation, bought sometime in 1978, four (4) parcels of adjoining lots located at Sen. Gil J. Puyat Avenue corner Leveriza Street, Pasay City from the F.J.R. Garments Industries, Inc.;that since their acquisition, the said properties have never been used for any business purpose nor been leased/rented to any person or business entity since 1979 up to the present; that no improvement, construction or building has ever been introduced thereat except the perimeter fence around the area; that in short, your company has held and treated these properties as capital assets; that in fact you have been paying the realty taxes on the said parcels of land regularly without deriving any benefit from them, thus prompting your company to decide on selling the said properties to any individual or entity that might be interested in buying them in their present condition. Based on the foregoing representations and documents submitted and in case you can find an interested and willing buyer of the property, and before you go through with the sale thereof, you are now requesting for a ruling on the following: 1. That subject properties not being used in business and just held as capital assets are correctly treated as such; 2. That the sale thereof shall be subject to the new capital gains tax of six percent (6%) based on the gross selling price or fair market value thereof, whichever is higher; and 3. That the capital gains tax to be paid thereon is a final tax, and that the gain presumed to be realized from the sale thereof is no longer includible in the other items of gross income in computing the taxable income which is subject to the normal corporate tax rate. In reply, please be informed that under Section 27(D)(5) of the Tax Code of 1997, a final tax of six percent (6%) is imposed on the gains presumed to have been realized in the sale, exchange or disposition of lands and/or buildings which are not actively used in the business of a corporation which are treated as capital assets based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher. From the foregoing provision of the Tax Code of 1997, it is clear that the said properties are being held by your company as capital asset since: 1) they are not used in its business; 2) they do not form part of its inventory; 3) they are not held for speculative purposes; and 4) they are not subject to depreciation. Accordingly, your queries are answered as follows: 1. That the said properties not being used in business or just held as capital assets are correctly treated as capital asset. 2. That the sale thereof shall be subject to the new capital gains tax rate of six percent (6%) based on the gross selling price or the fair market value at the time of sale, whichever is higher. 3. That the six percent (6%) capital gains tax is a final tax and the gains presumed to be realized from the sale thereof is no longer includible in the other items of gross income in computing the taxable income which is subject to the normal corporate tax rate. Moreover, as ruled in DA-009-2003 dated January 14, 2003, "Finally, as negatively defined in Section 39(A)(1) of the Tax Code of 1997, the term "capital assets" 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 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. "Considering that the Sucat property has not been used in trade or business since January 1999, and as such has been abandoned and treated as idle property, then the same may be considered a capital asset. "Based on the foregoing, we hereby confirm your opinion as follows: EDATSI xxx xxx xxx "(4) That considering that the Sucat property (i) has not been used in trade or business since Jan. 1999, nor leased out to tenants; (ii) it does not form part of PHILACOR's inventory; (iii) it is not held for speculative purposes; and (iv) it is not subject to depreciation, the same may be treated as 'capital asset'." 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group