BIR Ruling [DA-217-99]

April 12, 1999 BIR RULING [DA-217-99] Atty. Mariano A. Aguilar, Jr . Galleria Corporate Center Ortigas Avenue Quezon City S i r : This refers to your letter dated January 4, 1999 stating that GSD Realty and Development Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) on January 27, 1997; that since its incorporation it has not yet registered with the BIR nor has it applied for authority to print official receipts or sales invoices; that its only asset is a parcel of land which is idle, undeveloped and cogonal; that its original plan is to develop the property into a low cost and socialized housing project; that due to the regional financial crisis, it has decided to liquidate and dispose of said property and eventually retire from business; and that since its incorporation in 1997, it has never engaged in any business activity and/or transaction. In connection therewith, you are requesting a ruling as to whether or not said property can be classified as a capital asset; and that its subsequent sale shall be subject to the 6% capital gains tax. In reply, please be informed that the term "capital assets" 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. aSTHDc Such being the case, and since the corporation has not even registered with the BIR either as a VAT or a non-VAT taxpayer and has never engaged in any business activity and/or transaction, the corporation for all intents and purposes has not as yet engaged in the realty business. Accordingly, its aforementioned property can be classified as capital asset because the property does not fall under any of the exceptions stated in Section 39(A)(1) of the Tax Code of 1997. Thus, since the property is classified as a capital asset, the sale thereof shall be subject to the new capital gains tax rate of six percent (6%) based on the gross selling price or the fair market value at the time of sale, whichever is higher pursuant to Section 27(D)(5) of the Tax Code of 1997. The six percent (6%) capital gains tax is a final tax and the gains presumed to be realized from the sale thereof is no longer includible in the other items of gross income in computing the taxable income which is subject to the normal corporate tax rate. (BIR Ruling No. 133-98 dated September 15, 1998) 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. cDAEIH Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)