BIR Ruling [DA-171-05]

April 19, 2005 BIR RULING [DA-171-05] 27 (D) (5); 39 (A) (1), R.R. 7-2003; DA-301-2004; DA-669-2004; DA-155-2005 Breda Enterprises, Inc. Calderon St., Little Baguio San Juan, Metro Manila Attention: Mr. Jose S. Sanchez President Gentlemen : This refers to your letter dated April 15, 2005 requesting for a ruling that the sale of your real properties covered by Transfer Certificates of Title Nos. T-11870 and T-11880 both located in Tagaytay City shall be considered as a sale of capital assets, hence subject to the capital gains and documentary stamp taxes. It is represented that Breda Enterprises, Inc. ("Breda" for brevity) is a domestic corporation organized and existing under the laws of the Philippines with principal office at Calderon St., Little Baguio, San Juan; that it is engaged in the importation, trading and/or sale of refrigerant; that the secondary purposes of Breda as stated in its Articles of Incorporation includes the acquisition of properties as may be necessary or incidental to the conduct of the corporate business; that the principal purpose of Breda is to engage in, conduct and carry on the business of buying, selling, distributing, marketing at wholesale and retail of all kinds of goods, commodities, wares and merchandise of every kind and description; that the properties of the Spouses Jose and Virginia Sanchez located at Brgy. Asisan, Tagaytay City, a parcel of land with an area of 1,836.86 square meters more or less known as Lot l of the consolidation- subdivision plan (LRC) Pcs-13365 being a portion of the consolidation of Lots 2-B, 3-B and 4-B, Psd-18810 L.R.C. Rec. No. 39135 ( TCT No. T-11870 of the Registry of Deeds for Tagaytay City) and a parcel of land with an area of 1,836.86 square meters more or less known as Lot 2 of the consolidation subdivision plan (LRC) Pcs-13365 being a portion of the consolidation of Lots 2-B, 3-B and 4-B, Psd-18810, L.R.C. Rec. No. 39135 ( TCT No. 11880 of the Registry of Deeds for Tagaytay City) which are vacant lots, were transferred to Breda on January 29, 1999 by virtue of a Deed of Assignment in exchange for shares; that a ruling/certification was obtained from the BIR under SN No. 327-2004; that the said properties are not being used by Breda in its businesses; and that the two (2) parcels of land are now being sold to a prospective buyer. In reply, please be informed the term "capital asset" as negatively defined in Section 39(A)(1) of the Tax Code of 1997, 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. Treatment of abandoned and idle real properties. 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. In view of the foregoing, and considering that Breda Enterprises, Inc. 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 carry on the business of trading or selling of refrigerants; and that the aforementioned properties had not been used in the ordinary course of trade or business, it is the considered opinion of this Office that the income 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, whichever is higher, of such land and/or buildings pursuant to Sec. 27(D)(5) of the same Code. ( BIR Ruling Nos. DA-301-2004 dated June 1, 2004 and DA-155-2005 dated April 14, 2005 ) 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. aIcDCT 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group