NBS Law Office

March 30, 2007 BIR RULING [DA-197-07] Sec. 27 (D) (5); DA-692-2006; DA-014-2003 NBS Law Office 3/F, P & L Building, Legazpi Street Legazpi Village, Makati City Attention: Atty. Elvin Hayes E. Nidea Gentlemen : This refers to your letter dated March 8, 2007 requesting a ruling on the applicability of the provisions of Sec. 27 D (5) of the Tax Code of 1997, as amended, on the sale by KISKI DEVELOPMENT CORPORATION (Kiski for brevity) of its real properties. It is represented that Kiski is a domestic corporation established under the laws of the Republic of the Philippines. Kiski's was incorporated in 1987 as a family corporation. Its primary purpose is to acquire by purchase, lease, donation or otherwise, and to own, use, improve, develop, sell, mortgage, exchange, lease, develop and hold for investment or otherwise, real estate of all kinds, whether improve, manage or otherwise dispose of buildings, houses, apartments, and other structures of whatever kind, together with their appurtenances. In the course of the corporate life of Kiski, it acquired real properties, including two (2) parcels of land, with improvements, covered by Transfer Certificates of Title (TCT) Nos. 67431 and 37746 in 1992 and 1991, respectively, both located in Philam Quadrangle, EDSA, Quezon City. Since the time of acquisition of the above properties, the same were never used by the company in its trade or business. The said properties remained as the residences of the family patriarch, Mr. Victorino Floro, Jr. and of his son, Mr. Richard Floro. No income was ever derived from the above-mentioned properties. Kiski has never been engaged in the real estate business, hence, the above properties do not form part of the inventory of the company and had never been subjected to depreciation. Kiski treated the above-mentioned properties as investments. Although Kiski by its stated purposes in its Articles of Incorporation is seemingly involved in the real estate business, it was incorporated purely for the purpose as a holding company. It is your view that the above properties of Kiski are properly classified as part of its capital assets and that the sale thereof is subject to the 6% capital gains tax imposed under Section 27 (D) (5) and 1.5% documentary stamp tax imposed under Section 196, both of the Tax Code of 1997, as amended. In reply, please be informed that Section 27 (D) (5) of the 1997 Tax Code, 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 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 this Code, whichever is higher, of such lands and/or buildings." On the other hand, Sec. 39 (A) (1) of the same Code provides: " Capital Assets . The term "capital assets" 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 be properly 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." In BIR Ruling No. DA-692-2006 dated December 7, 2006, the Bureau ruled as follows: " It is undisputed that the yardstick for determining whether the property is capital asset or ordinary asset is the actual use of the said property. Thus, if the property is not actually used in trade or business of the taxpayer, whether or not connected with his trade or business, or not held for lease or sale to customers, it will be classified as a capital asset . Moreover, if the property is merely held for investment purposes and remains vacant and idle, it is deemed a capital asset. CDTSEI In stressing the rationale of the above-mentioned rule, this Office elucidated the matter in BIR Ruling No. 014-2003 dated October 28, 2003, as follows : " It is apparent under the foregoing provision that for a property to be considered an ordinary asset it must be actually used in the business of the corporation . Accordingly, on the condition that Wendell Holdings Co., Inc. is not habitually engaged in the real estate business as represented, the property under consideration is a capital asset. The property was neither held primarily for sale to customers nor actually used in the business of Wendell Holdings Co., Inc. The property is not actually used in the business of Wendell Holdings Co., Inc. as it has remained idle and undeveloped. Therefore, the sale of the property under consideration is a sale of a capital asset, not an ordinary asset. As such, the transaction is subject to capital gains tax of 6% under Section 27(D)(5) and not to the creditable withholding tax. " (Italics and emphasis supplied) In the instant case, the aforementioned real properties of Kiski are properly classified as capital assets because Kiski hold such properties as investments. Kiski never used said realties in business, hence, they never were subjected to depreciation, nor did they form part of its inventory of properties as Kiski never engages in the real estate business. Accordingly, the sale of said real properties is subject to the capital gains tax imposed under Section 27 (D) (5) of the 1997 Tax Code, as amended. CTSAaH Moreover, the sale of the above properties of Kiski, treated as capital assets, is not subject to the 12% value-added tax imposed under Section 106 of the 1997 Tax Code, as amended, in accordance with Sec. 4.109-1 (B) (p) of Revenue Regulations (RR) No. 16-2005, as amended by RR No. 4-2007, implementing Republic Act No. 9337. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service