Amada L. Eraña

March 3, 2008 BIR RULING [DA-117-08] DA331-07 Amada L. Eraa No. 44 Broadway Street New Manila S i r : This refers to your letter dated November 5, 2007 stating that Amada L. Eraa, Nieva Paz Eraa, Francisco L. Eraa, Florencia L. Eraa, Jose L. Eraa and Narciso L. Eraa (Landowners) are the absolute and registered owners in fee simple of three (3) adjoining parcels of land together with the improvements thereon located in Sampaloc, Manila covered by TCT Nos. 272367, 272368 and 272369 issued by the Registry of Deeds for Manila, under Tax Declaration Nos. C-041-00334, C-041-00332, C-041-00335, C-041-00333, which are classified as commercial considering that said properties are located within the business district of Manila; that the said properties were predominantly used as residential and have long been abandoned by the owners; that the Landowners have offered to sell unto Dr. George Cordero, as the Buyer, the above-described properties for the sum of P90,000,000.00 which is payable in two (2) equal installments at P45,000,000.00 on November 23, 2007 and the remaining P45,000,000.00 upon signing of the Deed of Absolute Sale. Based on the foregoing representations, you would like to request for confirmation of your opinion that the sale of the above-mentioned parcels of land together with the improvements thereon, classified as commercial under its tax declaration because the said properties are located within the business district of Manila although predominantly used as residential and have long been abandoned, are subject to the six percent (6%) capital gains tax under Section 24 (D) (1) of the Tax Code of 1997 and documentary stamp tax but not subject to the 12% VAT. In reply thereto, please be informed that Section 3 (e) of Revenue Regulations No. 7-2003 provides "e. Treatment of abandoned and idle real properties. Real properties formerly formed part of the stock in trade of a taxpayer engaged is the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Real property 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." CaEATI It is undisputed that from the above-cited provisions, if the real properties formed part of the stock in trade of a taxpayer engaged in real estate business, its abandonment or its subsequent becoming idle, will not convert the classification of the said properties from ordinary assets to capital assets. However, in the instant case, although the subject properties are classified as commercial under its tax declaration, because the properties are located within the business district of Manila, the same are not part of the stock in trade or inventory as the owners of the said properties are individuals who have never been engaged in real estate business, it is safe to conclude that the above-mentioned properties which have long been abandoned are capital assets. This is fortified in BIR Ruling No. DA040-03 dated February 10, 2003 , where it was held that "The proposed transfer via dacion en pago of undeveloped lots by Alsons Land Corporation shall be treated as a sale of capital assets subject to capital gains tax of 6% under Section 27(D)(5) in relation to Section 39(A)(1) of the Tax Code of 1997. The Deed of Dacion en Pago , embodying the dacion transaction, is subject to documentary stamp tax based on the consideration or value received or paid for the property, which in effect is the amount of obligation that is extinguished, or on its fair market value whichever is higher, pursuant to Section 196 of the Tax Code of 1997. The proposed dacion of ALC's undeveloped lots is not subject to the 10% VAT inasmuch as the said properties are neither being held primarily for sale or lease to its customers nor used in the ordinary course of his trade or business in accordance with Section 109(w) of the Tax Code of 1997." In the same vein, in BIR Ruling No. DA008-04 dated January 6, 2004 , this Office likewise ruled that ". . . it is necessary to first determine the character of the real property being sold. Thus, if the real property is a parcel of land which is not actually used in the business of the seller-corporation and is treated as capital asset, as that term is defined in Section 39(A)(1) of the Tax Code of 1997, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition based on the gross selling price or fair market value whichever is higher as determined accordance with Section 6(E) of the Tax Code of 1997. In the instant case the proposed sale of PWP's subject parcel of land shall be treat as a sale of capital asset subject to capital gains tax of 6% under Section 27(D)(5) in relation to Section 39(A)(1) of the said Code. However, the proposed sale of PWP's subject parcel of land is not subject to the 10% VAT inasmuch as PWP's subject parcel of land is not held primarily for sale or lease to PWP's customers nor for use in the ordinary course of PWP's primary trade or business . . . ." WHEREFORE, in view of the foregoing , this Office hereby confirms your opinion that the sale of the above-mentioned properties, which does not fall under any of the assets enumerated in Section 39 (A) (1) of the Tax Code of 1997 in relation to Section 3 (e) of Revenue Regulations No. 7-2003, are considered as capital assets and subject to 1. Capital gains tax of 6% pursuant to Section 24 (D) (1) of the Tax Code of 1997; 2. Documentary stamp tax at the rate of P15.00 for each P1,000 or fractional part thereof in excess of P1,000, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196, supra ; 3. However, the sale is not subject to the 12% VAT pursuant to Section 4.09-1 (p) of Revenue Regulations No. 16-2005 inasmuch as said properties are not held primarily for sale or lease to customers nor used in the ordinary course of their primary trade or business. 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