BIR Ruling [DA-213-02]

November 21, 2002 BIR RULING [DA-213-02] Secs. 27 (D) (5), 39 (A) (1), 105 BIR Ruling 133-98, DA-553-98 DA-687-99, DA-009-02 Sebastian Liganor Galinato & Tierra Attorneys-at-Law 1409 East Tower, Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Atty. Avelino M. Sebastian, Jr. Gentlemen : This refers to your letter dated November 20, 2001 requesting on behalf of your client MS AGRO-INDUSTRIAL DEVELOPMENT CORPORATION, for a confirmatory ruling that "(i) vacant and/or idle parcels of land, which were never used by MS Agro in trade or business, nor subjected to depreciation, nor included in its stock in trade or inventory, nor held primarily for sale or lease to customers in the ordinary course of business, and never rented out to any one since their acquisition, are collectively the capital assets in the hands of MS Agro; "(ii) the sale of the said properties which are classified as capital assets is subject to the six percent (6%) final capital gains tax based on the gross selling price or fair market value thereof, whichever is higher, pursuant to Section 27(D) of the National Internal Revenue Code of 1997 ("NIRC"); and "(iii) the disposition of the said properties, not being in the ordinary course of business, is not subject to the ten percent (10%) value-added tax. It is represented that MS AGRO-INDUSTRIAL DEVELOPMENT CORPORATION ("MS Agro") is a domestic corporation organized under Philippine laws, with office address at 1409 East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, Metro Manila; that MS Agro was organized primarily as a family holding company so that the shareholders thereof, all legitimate siblings, could jointly benefit from a collective investment in real estate and other assets; that its Articles of Incorporation and By-laws were originally registered with the Securities and Exchange Commission on March 28, 1984 under S.E.C. Registration No. 119941; that the primary purpose for which MS Agro was incorporated is as follows: "To invest in, or otherwise purchase, acquire, own and hold by way of investments, real and personal properties of every kind and nature, including without limitation land, buildings, condominium units, shares of stocks, bonds, debentures, notes, evidence of indebtedness, securities or obligations of any person, whether natural or juridical, and while the owner or holder of any such investments, to receive, collect and dispose the interest, dividends, earnings or profits of such investments; to possess and exercise in respect thereof all the rights, powers and privileges of ownership, including all voting rights of any stocks so owned; and to carry on and manage the general business of the corporation particularly in respect of its investments as provided hereinabove." that sometime in June 1984, MS Agro became the assignee of a money claim against Commercial Credit Corporation ("CCC"), a quasi-bank then operating in Makati City, Metro Manila; that between December 13, 1985 and June 30, 1986, CCC settled the money claim of MS Agro by way of a conveyance ( dacion en pago ) unto MS Agro of various vacant/idle parcels of land situated in Antipolo City, Marikina City and Paraaque, to wit: "(i) The Marikina Properties: 1. Lot 01, Block 61, Rancho Estate IV, Marikina City TCT No. 112274 2. Lot 18, Block 71, Rancho Estate IV, Marikina City TCT No. 112277 3. Lot 08, Block 69, Rancho Estate IV, Marikina City TCT No. 112278 4. Lot 09, Block 69, Rancho Estate IV, Marikina City TCT No. 112279 5. Lot 09, Block 72, Rancho Estate IV, Marikina City TCT No. 112280 6. Lot 07, Block 71, Rancho Estate IV, Marikina City TCT No. 114160 7. Lot 08, Block 75, Rancho Estate IV, Marikina City TCT No. 114161 8. Lot 20, Block 71, Rancho Estate IV, Marikina City TCT No. 116040 9. Lot 05, Block 72, Rancho Estate IV, Marikina City TCT No. 116041 10. Lot 35, Block 66, Rancho Estate IV, Marikina City TCT No. 119243 11. Lot 13, Block 60, Rancho Estate IV, Marikina City TCT No. 120155 12. Lot 03, Block 71, Rancho Estate IV, Marikina City TCT No. 120153 13. Lot 13, Block 64, Rancho Estate IV, Marikina City TCT No. 120626 "(ii) The Antipolo Properties: 1. Lot 35, Block 38, Rancho Estate III, Antipolo City TCT No. 112275 2. Lot 37, Block 38, Rancho Estate III, Antipolo City TCT No. 112276 3. Lot 06, Block 38, Rancho Estate III, Antipolo City TCT No. 112281 4. Lot 33, Block 38, Rancho Estate III, Antipolo City TCT No. 112282 "(iii) The Paraaque Property: 1. Lot 7, Psd-80932, La Huerta, Paraaque, Metro Manila TCT No. 100463 TCT No. 39374 that at the time of the conveyance to MS Agro, the Paraaque Property did not have adequate access to the main road, thus, on May 21, 1990, MS Agro had to purchase the adjoining property in order to gain a right of way; that this adjoining property is covered by Transfer Certificate of Title No. 39374 which was issued on March 22, 1990 by the Register of Deeds for Paraaque; that for the purpose of this request, the Paraaque Property shall collectively include TCT Nos. 100463 and 39374; that since its incorporation on March 28, 1984, MS Agro has not operated and did not enter into any commercial transaction other than the acceptance of the Marikina Properties, the Antipolo Properties and the Paraaque Property by way of settlement of a money claim; that furthermore, MS Agro has not derived any income, gain or revenue from any of the properties enumerated above since their respective acquisition dates to the date hereof; that neither has MS Agro introduced any improvement on any of the said properties; that the Marikina Properties, Antipolo Properties and Paraaque Property formed part neither of the stock in trade of MS Agro nor the inventory of MS Agro; that none of these properties were ever used by MS Agro in trade or business, as MS Agro has not conducted any; that no claim for depreciation was ever made on any of these properties; that all of the said properties remained vacant since their respective acquisition dates; that none of these properties were ever leased or rented out; that the shareholders of MS Agro, who are likewise its directors, now wish to recoup their respective investments which have remained idle for more than fifteen (15) years; that accordingly, they have approved a resolution to sell the Marikina Properties, the Antipolo Properties and the Paraaque Property at whatever price they could fetch; and that you are of the opinion that (i) the acquisition by MS Agro of the Marikina Properties, the Antipolo Properties and the Paraaque Property was in the nature of capital investments; (ii) that the disposition thereof is subject to the six percent (6%) final capital gains tax based on the gross selling price or fair market value thereof, whichever is higher, pursuant to Section 27(D) of the NIRC, and (iii) that the disposition of the said properties is not subject to the ten percent (10%) value-added tax. In reply, please be informed of the following: A) Section 39(A)(1) of the 1997 Tax Code defines " capital assets " as properly 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 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 . Based on the foregoing provision, the real property not used by the owner in its business, not forming part of inventory, not held for speculative purposes, and not being subjected to depreciation shall be classified as capital assets. In BIR Ruling DA-553-98 dated December 12, 1998, this Office adopted the criteria set by the Supreme Court in the case of Tuason, Jr. V. Lingad , 58 SCRA 170 (1974), in examining and evaluating whether or not a property is held as an ordinary asset or as a capital asset, thus (i) the purpose for which the property was acquired; (ii) the purpose for which the property was subsequently held; (iii) the extent to which improvements were made to the property; (iv) the frequency, number and continuity of sale; (v) the extent and nature of the transactions involved; (vi) the ordinary business of the taxpayer; (vii) the extent of advertising, promotion or other activities used in soliciting buyers for the sale of the property; (viii) the listing of property with brokers; and (ix) the purpose for which the property was held at the time of sale. (B) Pursuant to Section 27(D)(5) of the 1997 Tax Code, a final tax of six percent (6%) is imposed on the capital gains tax presumed to have been realized in the sale, exchange or disposition of lands and/or buildings which are not actively used in the business of a corporation (capital assets) based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the 1997 Tax Code, whichever is higher. If MS Agro has remained a holding company without any active operation from the time of its incorporation up to the present, and the subject properties of MS Agro have remained idle from the time they were acquired and were never leased to any party nor did they ever become part of MS Agro's income producing inventory, said properties would be considered as capital assets, and the sale thereof would be subject to the 6% capital gains tax. C) Pursuant to Section 105 of the Tax Code, the pertinent portion of which provides as follows "SEC. 105. Persons Liable . Any person who, in the course of trade or business , sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. "xxx xxx xxx "The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, non-profit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or guests), or government entity. (emphasis supplied) Further, Section 106(A)(1)(a) of the Tax Code subjects to VAT, among others, only real properties held primarily for sale to customers or held for lease in the course of trade or business. If the above listed properties are not held for sale or lease, the sale thereof is not subject to VAT. 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Enforcement Group