BIR Ruling [DA-160-06]

March 27, 2006 BIR RULING [DA-160-06] Section 27; DA-219-2005 J. T. Abangan & Co . Certified Public Accountants M-07 Mezzanine Floor, Cebu Long Se Building Osmea Blvd., corner Jasmin Street Cebu City Attention: Atty. Marie Joy T. Abangan Managing Partner Gentlemen : This refers to your letter dated October 5, 2005 requesting for confirmation of your opinion that the properties of your client, F. S. Serafica & Sons Enterprises, Inc. (FSSEI), are capital assets because they are not held primarily for sale to customers or held for lease in the ordinary course of trade or business. Consequently, the sale of these assets is not subject to the value added tax but only to the capital gains tax of six percent (6%) and one and one half percent (1.5%) documentary stamp tax imposed under Section 27(D) and Section 196, respectively, of the Tax Code of 1997, as amended. It is represented that FSSEI is a corporation duly organized and existing under the laws of the Republic of the Philippines. It is engaged in general construction and allied services. Its primary purpose, based on the Articles of Incorporation, states: "To engage in general construction and other allied businesses including the constructing, enlarging, repairing, removing and developing, or otherwise engaging in any work upon building, roads, highways, manufacturing plants, bridges, airfields, piers, docks, mines shafts, waterworks, railroads, railway structures, all iron, steel wood, masonry and earth construction and to make execute, bid for and take or receive any contracts or assignment of contracts therefore, in relation thereto, or connected therewith and to manufacture and furnish building materials and supplies connected therewith and doing of any and all other business and contracting incidental thereto or connected therewith, and the doing and performing of any and all acts and things necessary, proper or convenient for and incidental thereto." Sometime in 2003, FSSEI acquired real properties as additional contribution from one of its stockholders. While most of the properties transferred were used by FSSEI in its business operation, six (6) parcels of real properties, specifically described as follows: DIESHT TCT No. TD No. Location Area (sq. m.) Classification 44465 00002-00352 Alegria, Ormoc City 2,228 Residential 44466 00002-00356 Alegria, Ormoc City 214 Residential 44467 00002-00354 Alegria, Ormoc City 103 Residential 44468 00002-00353 Alegria, Ormoc City 2,229 Residential 44469 00002-00355 Alegria, Ormoc City 2,030 Residential 44470 01005-00078 Mabini St., Ormoc 177.35 Commercial City were held by the corporation as mere investments. From the time of acquisition up to the present, these properties were not used by the corporation and have been left idle and neither did FSSEI earn any income from these properties. In January 2005, FSSEI decided to put the abovementioned properties for sale in order to pay-off some of its bank loans and other liabilities. In reply, please be informed that Section 27(D)(5) of the Tax Code of 1997, as amended, provides, viz : "Sec. 27. Rates of Income Tax on Domestic Corporation . Capital Gains Realized from the Sale, Exchange, or Disposition of Lands and/or Buildings. 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 trade or 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 this Code, whichever is higher, of such lands and/or buildings." From the foregoing and based on the above representations, this Office hereby rules that the above subject properties are capital assets in the hands of FSSEI, thereby, the sale of the same shall be subject to the 6% capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997, as amended. Such conclusion is in consonance with the ruling of the Bureau in BIR Ruling No. DA-219-2005 dated May 5, 2005, which states that, when the real estate involved in the sale is idle, raw, undeveloped and has never formed part of the inventory for sale to customers and has not been used in trade or business, such real properties are properly classified as capital assets subject to a final tax of 6% on the gain presumed to have been realized from the sale or transfer pursuant to Section 27(D)(5) of the Tax Code of 1997, as amended. CHEDAc Considering that FSSEI is a corporation not primarily engaged in the real estate business and that the above enumerated properties were not used in its trade or business, the sale thereof is not subject to the 10% value-added tax (VAT) imposed under Section 106 of the Tax Code of 1997, as amended. However, it is subject to the 1.5% documentary stamp tax imposed under Section 196 of the same Tax Code. 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. SIaHTD Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service