Mantes Corporation

March 19, 2007 BIR RULING [DA-161-07] 27 (D) (5); 39 (A) (1); RR 7-2003; DA-060-2003; DA-301-2004 Mantes Corporation Room 402, Erlag Building Esteban Street, Legaspi Village Makati City Attention: Ms. Cristeta V. Diego Accountant Gentlemen : This refers to your letter dated March 9, 2007, requesting on behalf of your company, for a confirmatory ruling that a parcel of land with improvements transferred to a corporation in exchange for shares of stock remains a capital asset on the part of the transferee corporation. Thus, in case of sale of the said real property, the same shall be subject to the 6% capital gains tax and 1.5% documentary stamp tax, and not to the corporate income tax and value-added tax. It is represented that on September 30, 1991, Mantes Corporation (Mantes for brevity) filed and registered its Articles of Incorporation with the Securities and Exchange Commission; the primary purpose thereof is "To engage in, conduct and carry on the business of buying, selling, distributing, marketing at wholesale and retail insofar as may be permitted by law, all kinds of goods, commodities, wares and merchandise of every kind and description; to enter into all kinds of contracts for the export, import, purchase, acquisition, sale at wholesale or retail and other disposition for its own account as principal or in representative capacity as manufacturer's representative, merchandise broker, indentor, commission merchant, factors or agents, upon consignment of all kinds of goods, wares, merchandise or products whether natural or artificial." Sometime in 1998, a parcel of land together with the improvements thereon located at 841 Harvard Street, Wack Wack Village, Mandaluyong City, was transferred to and registered in the name of Mantes in exchange of shares of stock of the transferee corporation. As a consequence, the assignors gained control thereof. IcDCaT Prior to the said transfer, it was also represented that since the 1960s, the said parcel of land with improvements was being occupied by the owner-assignors as their residence. Nevertheless, in spite of the said transfer, the above-mentioned property remained in the possession of its previous owners who continuously occupied the said premises until they transferred to their new address sometime in March 2001. Furthermore, it was also represented that there was never a time that the said property was utilized in the conduct of business of Mantes. In reply, please be informed that the term "capital asset" as negatively defined in Section 39 (A) (1) of the Tax Code of 1997, as amended, means 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. Furthermore, in applying the provisions of Revenue Regulations (RR) No. 7-2003, particularly Section 3 (e) thereof, which provides to wit: "SEC. 3. GUIDELINES IN DETERMINING WHETHER A PARTICULAR REAL PROPERTY IS A CAPITAL ASSET OR ORDINARY ASSET. xxx xxx xxx e. xxx xxx xxx. Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2 (g) hereof are automatically converted into capital assets upon showing of proof that the same have not been used for more than two (2) years prior to the consummation of the taxable transactions involving said properties." (Emphasis supplied.) real properties owned by taxpayers not engaged in the real estate business or referring to those persons other than real estate dealers, real estate developers and/or real estate lessors, and those taxpayers deemed to be engaged in the real estate business whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business, shall, upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving the said real properties, and though classified as ordinary assets, be automatically converted into capital assets. EHSTcC In view of the foregoing, and considering that Mantes Corporation is a taxpayer not engaged in the real estate business , being not a real estate dealer, developer or lessor and whose primary purpose is to engage in, conduct and carry on the business of buying, selling, distributing, marketing at wholesale and retail insofar as may be permitted by law, all kinds of goods, commodities, wares and merchandise of every kind and description; and that the aforementioned property had already been idle and vacant for more than two years and had not been used in the ordinary course of trade or business by Mantes Corporation, it is the considered opinion of this Office that the income that will be derived from the sale thereof is not subject to the creditable withholding tax (expanded) under Sec. 2.57.2 (J) of Rev. Regs. No. 2-98, as amended, but to the capital gains tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Sec. 6 (E) of the Tax Code of 1997, as amended, whichever is higher, of such land and/or buildings pursuant to Sec. 27 (D) (5) of the same Code. Finally, the deed of sale conveying the above-mentioned parcels of land shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of the same Code, whichever is higher. 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