BIR Ruling [DA-168-97]

April 15, 1997 BIR RULING [DA-168-97] Atty. Quirico T. Carag, Jr. Suite 507 Equitable Bank Building 262 Juan Luna St., Binondo M a n i l a S i r : This refers to your letter dated April 11, 1997 requesting for a ruling in connection with the proposed plan of your clients, Mr. and Mrs. Juanito Gosiaco to sell or exchange thru " Dacion en Pago " some of the real properties which are registered in their names. It is represented that Mr. Juanito Gosiaco is engaged exclusively in the foundry business, manufacturing faucets and other plumbing items and has never been in the business of buying and/or selling real estate or real properties; and that they acquired several parcels of land from their savings in their long years in the foundry business and now intend to transfer said real properties to a family corporation either by way of sale or exchange with shares of stock. Based on the foregoing, you now request for a confirmation of your opinion/position, to wit: "1. That the proposed sale or exchange of these parcels of land, and more particularly described as follows: TCT/Lot Nos. Location Area TCT #30137 Lot 6 Hernandez, Paltok 1,162 Blk. 68 SFDM, Quezon City TCT #170771 Lot 14 Aragon St., Paltok 654 Blk. 67 SFDM, Quezon City TCT #45135 Lot 20 Hernandez, Paltok 780 Blk. 67 SFDM, Quezon City TCT #93672 Lot 16 Hernandez, Paltok 703 Blk. 67 SFDM, Quezon City TCT #255692 Lot 4 Cordillera, Maharlika 800 Blk. 323 San Jose, S. M. H. TCT #255694 Lot 8 Cordillera, Maharlika 800 Blk. 323 San Jose, S. M. H. TCT #255693 Lot 6 Cordillera, Maharlika 800 Blk. 323 San Jose, S. M. H. are not subject to value added tax (VAT) considering that our clients are not engaged in the real estate business; "2. That in the disposition of said parcels of land by sale or thru exchange with shares of stock, the gain, which is the value of said real properties at the time of their purchase and the fair market value at the time of its disposition be considered an ordinary income subject to income tax." In reply, please be informed as follows: 1. Pursuant to Section 100 of the Tax Code, as amended by Republic Act No. 7716, with respect to sale of real properties, VAT will apply only if the real properties are held primarily for sale to customers or held for lease in the ordinary course of trade or business. (VAT Ruling No. 002 dated May 9, 1996) 2. The subject real properties not being held primarily for sale to customers or held for lease in the ordinary course of trade or business are considered capital assets. Hence, pursuant to Section 21 (e) of the Tax Code, as amended, capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trust, shall be taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the time of the sale, whichever is higher. (BIR Ruling No. 029-96 dated February 27, 1996) aisadc 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, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)