Baniqued & Baniqued

April 4, 2007 BIR RULING [DA-212-07] DA 277-05 Baniqued & Baniqued Suite 803, 8/F Jollibee Centre San Miguel Avenue Pasig City Attention: Atty. Laura Victoria Yuson-Layug and Atty. Excelsis V. Antolin Gentlemen : This refers to your letter dated March 15, 2007 stating that your client, Wellton Corporation (Wellton), is a corporation duly organized and existing under Philippine law; that it is the registered owner of a parcel of land covered by TCT No. T-455901 and under Tax Declaration No. D-030-00447, along with the improvements thereon consisting of a warehouse, concrete pavement, concrete fence with cyclone wire, guardhouse/carport, mechanical room and canteen, which land and improvements are hereinafter referred to collectively as the "Property"; that for three and a half (3 1/2) years now, the Property has been vacant and idle and has not been leased to any party; that on August 8, 2005, the Toll Regulatory Board (TRB), on behalf of the Government, filed a complaint for expropriation of a portion of the Property for the purpose of implementing its project to extend the South Luzon Expressway; that the complaint entitled " Republic of the Philippines, rep. by the Toll Regulatory Board vs. Wellton Corporation " was docketed before the Regional Trial Court (RTC) of Calamba City-Branch 34 as Civil Case No. 3822-2005-C; that while the Government desires to expropriate only 13,055 (out of 20,687) square meters of the land, the improvements would naturally have to be demolished upon expropriation to pave the way for the extension of the South Luzon Expressway from Calamba, Laguna to Sto. Tomas, Batangas; that the expropriation of the portion of the Property would greatly impair the value, if not entirely render unfit for lease or use, the Property; that Wellton filed its Answer to the complaint contending, among others, that the TRB made an erroneous declaration of the value of the Property and that under Republic Act (RA) No. 8794, the expropriating agency is required to pay the owner, upon filing of the complaint for expropriation, an amount equivalent to one hundred percent (100%) of the Property's value based on the zonal valuation of the BIR; that the TRB filed an Amended Complaint in which the TRB described in more detail the improvements that existed on the land being expropriated and reduced the market value of the said improvements; that as required by the rules on expropriation, cash deposit equivalent to 100% of the Property's zonal valuation was made with the Development Bank of the Philippines; and that the proceedings on the final determination of just compensation payable to Wellton are still pending in court as of this date. In connection therewith, you now request confirmation of your opinion that the expropriation of the Property by the Government, represented by the TRB, is subject to 6% capital gains tax and documentary stamp tax (DST), both based on the actual consideration received by Wellton and finally determined by the Court as just compensation, but is not subject to VAT. In reply thereto, please be informed that Section 39 of the Tax Code of 1997 defines capital assets as property held by the taxpayer (whether or not connected with his trade or business), but not including the following: 1. 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; 2. property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; 3. property used in trade or business of a character which is subject to allowance for depreciation provided in Subsection (F) of Section 34; or 4. real property used in the trade or business of the taxpayer. 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. In stressing the rationale of the above-mentioned rule, this Office elucidated the matter in BIR Ruling No. DA227-05 dated June 23, 2005 , as follows: ". . . inasmuch as the particular portion measuring 804.90 square meters of the aforementioned property of your Company had already been abandoned by the tenants, had become idle from the time, that LRTA entered the property, could no longer be used in the trade or business of GMC, and was subsequently demolished to give way to the LRTA-Line 2 project, the income derived from the expropriation sale of the specified portion of the property measuring 804.90 square meters is not subject to the expanded withholding tax under Section 2.57.2(J) of Revenue Regulations No. 2-98, but only to the 6% capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the Tax Code, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher. Furthermore, the gross receipts derived from the sale of the same is not subject to value-added tax (VAT), the said sale being involuntary and forced upon only on the seller by virtue of the exercise of the government's power of eminent domain and therefore it cannot be said to have been conducted in the course of the taxpayer's trade or business. . . . " At this juncture, observation may be made of the fact that in the case of real property which is idle and vacant and had not been used in the ordinary course of trade or business nor had it ever been classified as property of a kind which would properly be included in the inventory if on hand at the close of the taxable year, nor had it ever been held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, the income derived from the sale thereof is not subject to the expanded withholding tax under Section 2.57.2 (J) of Revenue Regulations No. 2-98, but only to the 6% capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the same Code which provides that when one of the contracting parties is the Government, the tax therein imposed shall be based on the actual consideration. Lots or improvements, classified as "investment properties", which are idle, unproductive and unimproved since the time of acquisition, and do not fall under any of the assets enumerated under Section 39 (A) (1) of the Tax Code of 1997 and 2(b) of Revenue Regulations No. 7-2003 are classified as capital assets, the sale of which is subject to 6% capital gains tax, DST of 1.5% but exempt from 12% VAT ( BIR Ruling No. DA152-04 dated March 31, 2004 ) DTISaH Accordingly, we hereby confirm your opinion that the expropriated sale of the above-mentioned property which has remained idle and considered as capital assets, is: (1) subject to the capital gains tax of 6% pursuant to Section 27 (D) (5) of the Tax Code of 1997 based on the just compensation as actual consideration pursuant to RMO No. 41-91; (2) subject to DST at the rate of P15.00 for each P1,000.00 or fractional part thereof in excess of P1,000.00, or 1.5% of the just compensation as actual consideration pursuant to Section 196, supra ; (3) exempt from the expanded withholding tax prescribed in Revenue Regulations No. 2-98, as amended; and (4) exempt from 12% VAT, the property not being primarily held and offered for sale or lease to customers in the ordinary course of Wellton's trade or business, as provided under Section 109 (w) of the Tax Code of 1997. (BIR Ruling No. DA270-04 dated May 17, 2004) 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