BIR Ruling [DA-264-03]

August 14, 2003 BIR RULING [DA-264-03] DO 16-98; DA 009-03 Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Benedicta Du-Baladad Partner Gentlemen : This refers to your letter dated June 17, 2003 stating that your client, D.M. Consunji, Inc. (DMCI) is a domestic corporation organized and existing under Philippine laws engaged in general construction and other construction component businesses; that it is the owner of seven (7) parcels of land located within the West Service Road of the South Luzon Expressway, within Barangay Merville (formerly Barrios of Baliwag and Ibayo), Paraaque City; that the total lot area of the seven (7) parcels of land is 20,195 square meters under the following titles: TCT No. Lot No. Area (sq. m.) 82168 4 12,165 82170 5191-A 250 82171 3 6,056 82172 5191-B/5191-D 134/250 82173 5191-C 250 82174 2-B 1,090 20,195 ===== that the frontage of the above-mentioned property is equal to 3,357 square meters or 111.9 meters multiplied by the standard depth of 30 meters, along the West Service Road of the South Superhighway; and that the rest of the property consists of 16,838 square meters. ESHAIC Based on the foregoing representations, you now request confirmation of your opinion that "1. (T)he zonal value of P25,000 for lots located along South Superhighway should only apply to the frontage of the property with a total lot area of 3,357 square meters and not to the total property; "2. (T)he interior portion of the above-mentioned property which cannot be classified under any particular street/subdivision shall be classified and valued under "All Other Streets" with a zonal value of P4,000.00; and "3. Considering that the Paraaque Property is being used by DMCI for business purposes, the same is considered as ordinary asset and subject to ordinary income tax of 32% based on net income and to the 6% creditable withholding tax." In reply thereto, please be informed that this Office had already occasioned to rule on the matter in BIR Ruling No. DA009-2003 dated January 14, 2003, when it said that for internal revenue tax purposes, in determining the correct value of land where the depth of the lot is deeper than the standard depth of land, it is an accepted principle that the area of lot beyond the standard depth is valued lower than the frontage area. This is because as the depth of lot increases, the unit value decreases. The above-cited ruling is a reiteration of BIR Ruling No. 114-99 dated July 29, 1999, where the same Office ruled that "xxx xxx xxx "It is undisputed that the zonal value or fair market value of lots located along the Zapote-Alabang Road is at P19,900.00. However, this Office recognizes that to extend such zonal valuation not only to the frontage area but to the rest of the property would be inequitable and unjustified under the premises. According to the rules of valuation under the above-quoted Department Order No. 10-97 and considering the guidelines in the valuation of urban lands, the following are in order: (a) Only lots located along the Alabang-Zapote Road and vicinity (Ceciles R. Moonwalk) are valued at P19,900 for tax purposes. (b) If the area cannot be classified under any particular street/subdivision of vicinity, the area would be lumped under the "All Other Streets" category; (c) The valuation of lands under the "All Other Streets" category are as follows: i) Residential-Residential P2,200.00 ii) Commercial-Residential 3,700,00 iii) General Purpose 1,900.00 "Applying therefore the foregoing rules, with the exception of the frontage area, the remaining area of the property consisting of vacant, cogonal and undeveloped portion with an area of 68,529 sq. m., would be properly classified as general purpose lot. . . . . "Hence, since the frontage area would consist of 4,500 sq. m. (150 meters x 30 meters), applying the zonal value of P19,900, the fair market value of this particular portion is P85,500,000. The remaining property would be general purpose lot with an assigned zonal value of P1,900.00. . . ." In applying the above-cited rulings in the case at bar, this Office hereby confirms your opinion that 1. Department Order No. 16-98, otherwise known as the Revised Zonal Values of Real Properties in the Municipality of Paraaque under Revenue District Office No. 52, the following are the rules in computing the fair market value of DMCI's property: a. Only lots located along the South Superhighway are valued at P25,000.00 for tax purposes; b. If the area cannot be classified under any particular street/subdivision or vicinity, the area would be lumped under the "All Other Streets" category; c. The valuation of lands under the "All Streets" category as follows: i. Residential-Regular P5,000 ii. Commercial-Regular 10,000 iii. General Purpose 4,000 Accordingly, the zonal valuation of P25,000.00 should only be applied to the frontage of the aforesaid property consisting of 3,357 square meters or with an aggregate value of P83,925,000.00, otherwise to extend such zonal valuation to the entire property would be inequitable and unjustified under the premises. DSTCIa 2. The remaining area of the said property consisting of 16,838 square meters would be properly classified under "all other streets" since it cannot be classified under any particular street/subdivision or vicinity. The same shall be valued as general purpose lot with a zonal value of P4,000.00 per square meter as it is neither a residential nor a commercial lot. Such being the case, the fair market value of the remaining portion of the aforesaid lot is P67,352,000.00. 3. Sec. 2(b) of Revenue Regulations No. 7-2003 defines the term "Ordinary Assets" to all real properties excluded from the definition of capital assets under Section 39(A)(1) of the Tax Code of 1997, namely: 1. Stock in trade of a taxpayer or other real 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. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; 3. Real property used in trade or business ( i.e. , buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Section 34(F) of the Code; 4. Real property used in trade or business of the taxpayer. Since the aforesaid property of DMCI is indeed used in business, the same is considered as an ordinary asset. Accordingly, the sale of ordinary asset, regardless of classification thereof, shall be subject to the creditable withholding tax of 6% under section 2.57.2(J) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, and consequently to the ordinary income tax under Section 27(A) of the Tax Code of 1997. (Sec. 4(c)(ii) of Revenue Regulations No. 7-2003) 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. EIDTAa Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group