BIR Ruling [DA-119-00]

February 23, 2000 BIR RULING [DA-119-00] Baniqued & Baniqued Suite 803, 8/F Jollibee Centre San Miguel Avenue Pasig City Attention: Attys . Carlos G . Baniqued and Laura Victoria A . S . Yuson Gentlemen : This refers to your letter dated December 10, 1999 stating that your client, Metro Centre Mercantile Corporation (Metro Central)", is a domestic corporation with office address at Room 608, 6th Floor, 1010 Building, A. Mabini, Ermita, Manila; that it previously owned a parcel of idle or vacant land (Makiling Property) situated in Makiling, Calamba, Laguna with an area of 20,786.50 square meters covered by TCT No. T-60835 issued by the Registry of Deeds for the province of Laguna; that Metro Central acquired the Makiling Property as far back as December 1978 or more than 20 years ago; that Metro Central purchased and held the said property as a capital investment and thus never entered into any deal or transaction whatsoever involving the said property until it was sold recently nor had Metro Central introduced any improvements thereon; that the Makiling Property had neither been leased or rented out by Metro Central to any one nor had offered or attempted to lease or sell it to any party until the recent sale to Wellton Corporation (Wellton); that on September 22, 1999, a Deed of Absolute Sale was entered into by and between Metro Central and Wellton whereby the former transferred to the latter the above-mentioned Makiling Property in full payment of its outstanding monetary obligations to Wellton in the amount of P9,000,000.00 as of June 30, 1999; that on October 4, 1999; Metro Central and Wellton sought to pay the capital gains tax and documentary stamp tax on the aforesaid transaction involving the Makiling Property based on the zonal valuation since the same is higher than the consideration agreed upon in the Deed of Absolute Sale; inasmuch as metro Central had always held the Makiling property as a capital asset, it prepared and filed with the Revenue District Office (RDO) No. 56, Calamba, Laguna, a Capital Gains Tax Return and a Documentary Stamp Tax Return for the purpose of paying the requisite taxes due on the said transfer; that subsequently, RDO No. 56, relying solely on the fact that Metro Central was registered with the BIR as a real estate lessor as per its BIR Certificates of Registration, assessed deficiency taxes on the transaction; that RDO No. 56, opined, notwithstanding the objection of Metro Central, that the Makiling Property was an ordinary asset in the hands of Metro Central and therefore, the sale or conveyance thereof is subject to 7.5% creditable withholding tax instead of the final 6% final capital gains tax; and that to avoid further delay in the issuance of the Certificate Authorizing Registration (CAR) and due to pressure from the buyer, Metro Central was constrained to pay the deficiency tax thus assessed. Based on the foregoing, you now request for confirmation of your opinion that (a) the Makiling Property was indeed a capital asset in the hands of Metro Central; (b) the sale of the Makiling Property, being a capital asset, is subject to the 6% final capital gains tax, based on the gross selling price or fair market value thereof, whichever is higher, pursuant to Section 27(D)(5) of the Tax Code of 1997; and (c) the disposition of the Makiling Property, being an isolated transaction involving a capital asset is not subject to value added tax. In reply thereto, please be informed that your opinion is hereby confirmed as follows: (a) Section 27(D)(5) of the Tax Code of 1997 provides that a final tax of six percent (6%) is hereby imposed on the gains 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" which means property held by the taxpayer (whether or not connected with his trade or business), but does not include the 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 certainty that the Makiling Property previously owned by Metro Central was indeed a capital asset, since the same was never part of the latter's stock in trade nor included in the inventory at the close of the taxable year. Neither was it primarily held for sale or lease to its customers in the ordinary course of its business nor ever subjected to depreciation. Consequently, the Makiling Property which had remained vacant or idle since the time of its acquisition in 1978 and was subsequently sold to Wellton was a capital asset in the hands of Metro Central. (BIR Ruling No. 133-98 dated September 15, 1998) 2. The sale thereof shall be subject to the six percent (6%) capital gains tax based on the gross selling price or fair market value, whichever is higher, pursuant to Section 27(D)(5) of the Tax Code of 1997. 3. The sale of the said Makiling Property, which is classified as capital asset, by Metro Central to Wellton is not subject to value-added tax, since the sale thereof is not in the course of trade or business of the former pursuant to Section 105 of the Tax Code of 1997. (BIR Ruling No. 006-97 dated January 17, 1997) cdll This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group