BIR Ruling [DA-219-05]

May 5, 2005 BIR RULING [DA-219-05] Sec. 39 (A) (1); RR 7-2003; DA-152-2004; 168-2005; 155-2005; 024-2001; 397-2000 Atty. Roehl M. Galandines Counsel for Golden Steel 2604-A East Tektite Tower PSE Centre, Exchange Road, Ortigas Business Center, Pasig City S i r : This refers to your letter dated December 13, 2004 requesting on behalf of your client, GOLDEN STEEL REAL, ESTATE DEVELOPMENT CORPORATION, with office address at No. 109 9th Avenue, Cubao, Quezon City, for confirmation of your opinion that (i) The vacant and/or idle real property which were never used by GOLDEN STEEL REAL ESTATE DEVELOPMENT CORPORATION in its 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 its business, and never rented out to any one since its acquisition, is classified as capital asset in the hands of GOLDEN STEEL REAL ESTATE DEVELOPMENT CORPORATION; (ii) The sale of the said vacant and/or idle real property classified as capital asset in the hands of GOLDEN STEEL REAL ESTATE DEVELOPMENT CORPORATION is subject to the 6% capital gains tax and 1.5% documentary stamp tax, pursuant to Sections 27 (D)(5) and 196 (b) of the 1997 Tax Code; (iii) The sale of the said vacant and/or idle real property, not being used in the ordinary course of the trade or business of GOLDEN STEEL REAL ESTATE DEVELOPMENT CORPORATION is not subject to the 10% value-added tax. It is represented that sometime in 1988 GOLDEN STEEL REAL ESTATE DEVELOPMENT CORPORATION (GSREDC for brevity) was incorporated; that Mr. Jesus Cabalza and Ms. Sumiko Koizumi owned and held substantially all the shares of stock of GSREDC; that sometime in 2001 Mr. Jesus Cabalza was forcibly abducted and up to now it is not known whether he is still alive; that subsequently, sensing that there was corporate maneuvers by the other stockholders, directors and officers of GSREDC to divest Mr. Cabalza of his majority shares, his wife Ms Araceli Cabalza filed a case before the Regional Trial Court (RTC) of Quezon City seeking, among others, to enjoin the other stockholders, directors, and officers from unseating Mr. Jesus Cabalza as the President and Chairman of the Board of GSREDC and eventually, divesting or manipulating his shares; that in the course of the investigation of the abduction of Mr. Jesus Cabalza, certain documents were retrieved from his personal files, among which is TCT No. 196501; that apparently, the other stockholders, directors, and officers of GSREDC were not aware of the existence of the property; that the property had never been, declared and, reported in any financial Statements submitted by GSREDC to the BIR; that evidently, GSREDC never held nor used the property in the ordinary course of its business; that in fact, the property, as attested by the Quezon City Assessor's Office and the Barangay Chairman of the place where the property is located, has never been developed or used by the GSREDC in the ordinary course of its business; that from the time of its acquisition by Mr. Jesus Cabalza in the name of GSREDC until it was transferred, the property had remained vacant and idle; that the property was presented before and brought to the attention of the trial court; that subsequently, after a heated court battle between the plaintiffs and the defendants, judgment was rendered by the RTC, Quezon City, Branch 90; that in a decision, the court directed the above-mentioned property to be sold and the proceeds thereof divided between Ms. Araceli Cabalza and Ms. Sumiko Koizumi; that the sale of the property was made by virtue of the court decision which also ordered the dissolution of GSREDC; that it is worthy to stress that subject property; was not, at any time from its purchase held by GSREDC primarily for sale to customers in the ordinary course of its trade or business of a character which is subject to the allowance for depreciation; and that as mentioned earlier, the existence of the property was not known to the other stockholders, directors, and officers of GSREDC and the same was not reported in its Audited Financial Statement, hence, the property is considered as capital asset. In reply, please be informed that pursuant to Section 27(A) of the Tax Code of 1997, whenever a corporate-real estate developer sells real properties forming part of its inventory or those primarily held for sale to customers, it is considered as a sale of ordinary assets subject to the 32% income tax. However, when the real estate involved is idle, raw, undeveloped, has never formed part of the real estate developer's inventory for sale to customers and has not been used in its trade or business, such real properties are properly classified as capital assets subject to a final tax of 6% on the gain presumed to have been realized from the sale or transfer pursuant to Section 27(D)(5) of the Tax Code of 1997. Thus, if the real property is a land or building which is not actually used in the business of the seller-corporation and is treated as a capital asset, as that term is defined in Section 39(A)(1) of the Tax Code of 1997, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, of such land and/or building. [Sections 27(D)(5) Tax Code of 1997] This rule applies, whether or not the seller-corporation is engaged in real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, shall apply. (BIR Ruling No. 27-02 dated July 3, 2002) Based on your representation, the property of GSREDC 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, based on the gross selling price or FMV as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher. (BIR Ruling Nos. DA-217-99 and DA-010-02 dated April 12, 1999 and January 29, 2002) Corollarily, only such real properties held by a real estate developer primarily for sale or lease to customers in the ordinary course of its real estate development business, and therefore, would be properly included in the inventory of such taxpayer if on hand at the close of the taxable year, or used in his trade or business, area appropriately classified as ordinary assets. Otherwise stated, real properties of a real estate developer other than those enumerated under Section 39(A)(1) of the Tax Code of 1997 and Section 2(b) of Revenue Regulations No. 7-2003 are properly deemed as capital assets. Accordingly, we hereby confirm your opinion that: 1. The subject realty of GSREDC which has remained vacant, idle, unproductive and unimproved since the time of acquisition, does not fall under any of the assets enumerated under Sections 39(A)(1) of the Tax Code of 1997 and Section 2(b) of Revenue Regulations No. 7-2003 is properly classified as capital assets; 2. The sale of the aforementioned property classified as capital asset is subject to capital gains tax of 6% on the gain presumed to have been realized from the sale or transfer pursuant to Section 27(D)(5) of the Tax Code of 1997 and to the documentary stamp tax at the rate of P15.00 for each P1,000 or fractional part thereof in excess of P1,000 or 1.5% of the consideration or fair market value of the property whichever is higher pursuant to Section 196 of the same Code (BIR Ruling Nos. DA-152-2004 dated March 31, 2004, DA-155-2005 dated April 14, 2005 and DA-168-2005 dated April 15, 2005); and 3. The gross receipts derived from the sale of the same is not subject to VAT, the said sale being involuntary and forced upon only on the seller to enforce and/or to satisfy a court judgment and, therefore, it cannot be said to have been conducted in the course of the taxpayer's trade or business (BIR Ruling Nos. DA-024-2001 dated February 26, 2001 and DA-397-2000 dated November 20, 2000). HAICET 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