BIR Ruling [DA-106-01]

June 1, 2001 BIR RULING [DA-106-01] 39; 27; RR 2-98 143-99 Ocampo & Ocampo 11th Floor, Equitable PCI Bank Tower Bldg., 8751 Paseo de Roxas Avenue, Makati City Attention: Atty . Miguelito V . Ocampo Partner Gentlemen : This refers to your letter dated December 5, 2000 requesting for a ruling on the following issues: 1. whether or not real property, consisting of land and buildings, acquired by United Coconut Planters Bank (UCPB) in the normal course of its banking operations (ROPOA) are considered as ordinary assets and not capital assets; 2. in the event of a sale by UCPB of such ROPOA, the gains from the sale shall be subject to ordinary income tax and not capital gains tax; 3. despite the fact that UCPB is not registered with the Housing and Land Use Regulatory Board (HLURB) or the Housing Urban Development Coordinating Council (HUDCC), payments to UCPB as consideration for the sale of acquired assets shall be subject to the graduated rate of withholding tax pursuant to Sec. 2.57.2 (J) of Revenue Regulations No. 2-98. EcHIAC It is represented that UCPB is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines. It is duly licensed and engaged in the business of a universal bank. As such, UCPB, in the normal course of its banking operations, accepts real property consisting of land and buildings as security or collateral for loans and eventually acquires title to such land and building in the settlement or payment of such loans. UCPB usually acquires title to such real properties through foreclosure proceedings or voluntary dacion en pago arrangements with the borrowers in the event that the borrowers will not be able to pay the loan on maturity date. UCPB subsequently consolidates its title to the foreclosed real property upon expiration of the redemption period allowed by law without the borrower redeeming the property. All the foregoing actions are premised on the authority provided for under Secs. 47 and 52 of the General Banking Law of 2000. In reply, please be informed that Section 39 of the Tax Code of 1997, defines capital assets as property held by the taxpayer (whether or not connected with his trade or business), but does not include the following: 1. 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; 2. property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; 3. property used in trade or business of a character which is subject to depreciation allowance; or 4. real property used in the trade or business of the taxpayer. Based on the aforesaid definition of the term "capital asset", this Office hereby holds that UCPB's ROPOA which represents real properties consisting of land and buildings, other than those used for banking purposes or held in the investment portfolio, acquired through foreclosure of collaterals of client borrowers who were unable to pay their loans with UCPB, should be treated as ordinary assets of UCPB and therefore the gains derived by the bank in the event of a sale, exchange or other dispositions of such properties will not be subject to the capital gains tax imposed under Sec. 27(D)(5) of the Tax Code of 1997. Rather, the gains from such sales, exchanges or other dispositions shall be included in the UCPB's net taxable income during the year pursuant to Sections 27 and 52 of the Tax Code of 1997. Moreover, the gross selling price or total consideration or fair market value, whichever is higher, for the sale, exchange or other disposition of such property shall be subject to the graduated rate of withholding tax pursuant to Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended, and shall also be the basis of the documentary stamp tax imposed under Sec. 196 of the Tax Code of 1997. 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. HcSaTI Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group