BIR Ruling [DA-111-03]

April 8, 2003 BIR RULING [DA-111-03] 27 (D) (5) 006-97 Atty. Rommel M. Santiago C/o Room 401 Alexander House 132 Amorsolo Street Legaspi Village Makati City S i r : This refers to your letter dated August 23, 2001 requesting on behalf of your client, Manrose Enterprises Corporation (Manrose) [formerly Crisland Realty & Development Corporation], for a ruling that the sale, transfer, barter and/or exchange of its real properties is exempt from the 10% value-added tax, but subject to the 6% capital gains tax and the corresponding 1.5% documentary stamp tax respectively imposed under Sections 27(D)(5) and 196 both of the Tax Code of 1997. It is represented that Manrose is a corporation duly registered with the Securities and Exchange Commission (SEC) on October 6, 1981 with SEC Registration No. 101257; that said corporation, although having been formally organized and incorporated, did not actually operate its business from its inception up to the present; that it is the registered owner of several real properties that are vacant, underdeveloped and which are not used in the ordinary course of business; that on February 10, 2000, Manrose has amended its primary purpose to a general trading business. In reply thereto, please be informed that Section 27(D)(5) of the Tax Code of 1997 provides that "[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 the [said] Code, whichever is higher, of such lands and/or buildings. In relation thereto, Section 39(A)(1) of the said Code defines the term "capital assets" to mean "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." From the foregoing provisions of the 'Tax Code, there can be no uncertainty that the properties held by Manrose are, indeed capital assets, since the same are neither part its stock in trade nor included in its inventory at the close of the taxable year. They are neither primarily held for sale or lease to its customers in the ordinary course of its business nor were they ever subjected to depreciation. Considering that the Manrose properties remained vacant or idle since the time of their acquisition and the subsequent amendment of the company's Articles of Incorporation from real estate to general trading business because it never operationalized its realty business, then the said properties are deemed to be capital assets in the hands of Manrose and the subsequent sale thereof shall be subject to six percent (6%) capital gains tax and documentary stamp tax that are respectively imposed under Sections 27(D)(5) and 196 of the Tax Code of 1997, based on the gross selling price or fair market value, whichever is higher. ( BIR Ruling No. DA672-99 dated December 9, 1999 ) However, Section 109(w) of the same Tax Code provides that 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 value-added tax. Inasmuch as the Manrose properties are classified as capital assets, the sale thereof shall be exempt from value-added tax, since the same are not in the course of trade or business of Manrose. ( VAT Ruling Nos. 021-98 dated August 5, 1998; 006-97 dated January 17, 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group