BIR Ruling [DA-277-05]

June 23, 2005 BIR RULING [DA-277-05] 27 (D) (5); 39 (A) (1); DA 024-2001; DA 397-2000 Cruz Durian Alday & Cruz Matters ACC LAW Building 451-461 Cabildo St. Intramuros, Manila Attention: Atty. Leticia E. Ala M a d a m : This refers to your letters dated May 25, 2005 and June 17, 2005 in behalf of your client, GUIDOTE MERCANTILE CORPORATION (GMC), requesting for a ruling on the tax consequence of the expropriation by the Light Rail Transit Authority (LRTA) of a portion of real property owned by GMC. It is represented that GMC is a domestic corporation and is the registered owner of real property with improvements situated along Legarda St., Brgy. San Miguel, Manila with a total area of 2,042.50 square meters covered by TCT No. 116996; that sometime in the year 2001, the Light Rail Transit Authority (LRTA) filed a Complaint for Eminent Domain with the Regional Trial Court of Manila over a portion measuring 804.90 square meters of the said property for the construction and implementation of Line 2 of the Metro Manila Strategic Mass Rail Transit Development Project of LRTA; that the complaint was docketed as Special Civil Action No. 01-101326, entitled LRTA vs. Guidote Mercantile Corporation, et. al; that the Regional Trial Court of Manila, Branch 52 rendered a decision dated February 24, 2004 confirming and declaring the legal right of LRTA to lawfully take possession of the 804.90 square meters of the real property under consideration; that when LRTA entered the property in 2001 to demolish part of the structure therein, GMC completely lost its business from the said property because the tenants immediately relocated and the demolition rendered the property unfit for occupancy. TAcCDI In reply, please be informed that the provision of the Tax Code applicable to the issue you brought before us is Section 39(A)(1) of the Tax Code of 1997 which negatively defines the term " capital assets " to mean 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 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. In view of the foregoing, and 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. (BIR Ruling No. DA-397-2000 dated November 20, 2000 and VAT Ruling No. 27-96 dated September 23, 1996) 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