BIR Ruling [DA-280-00]

July 10, 2000 BIR RULING [DA-280-00] 39 (A) (1) 059-99 dated April 30, 1999 DA-280-2000 Security Bank Corporation Security Bank Centre, 6776 Ayala Avenue Makati City Attention: Mr . Rirolaido E . Payongayong Acquired Assets Officer Property Management Division Gentlemen : This refers to your letter dated February 7, 2000 requesting for a ruling on the following issues: "1. Is the real estate mortgaged properties subsequently foreclosed, consolidated and disposed/sold by the bank can be considered as ordinary assets rather than capital assets; "2. Does the bank qualify as habitually engaged in the real estate business whose income from sale or disposition of the same is subject to a creditable withholding income tax rate provided for in Section 2.57.2(J) of Revenue Regulations No. 2-98; "3. With regard to your previous payments, are you entitled to a refund; and "4. When is the creditable withholding tax and documentary stamp tax due? Is it the date when the documents are made, signed, accepted and/or notarized? Or is it the date of the official receipt?" In reply thereto, please be informed as follows: 1. Section 39(A)(1) of the Tax Code of 1997 provides for the definition of the term "Capital Assets" which 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 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. Prescinding from the above, the determination of whether a piece of property is so excluded from the definition of capital asset, the nature and character of the taxpayer's title to the property, the reason, purpose and intent of acquisition and ownership, as well as its period of duration, among others, should be considered. Considering that Section 25 of the General Banking Act provides that . . . no such bank shall hold the possession of any real estate under mortgage or trust deed, or the title and possession of any real estate purchased to secure any debt due to it, for a longer period than five years, it is crystal clear that foreclosed properties which were consolidated and disposed of by the bank are in the nature of ordinary assets since the same are so included in the inventory of assets to be sold in the course of its business. 2. In BIR Ruling No. 059-99 dated April 30, 1999, this Office ruled that . . . the term "habitually engaged in the real estate business" is not limited or restricted only to persons duly registered with the Housing and Land Use Regulatory Board (HLURB) or Housing and Urban Development Coordinating Council (HUDCC). This proviso simply means that any person duly accredited by the said government agencies shall be deemed habitually engaged in the real estate business. However, even in the absence of registration therewith, a person may also be treated habitually engaged in the real estate business upon showing that he is in fact actually engaged in the said business. For example, a lessor of real properties may not be registered with the HLURB or the HUDCC, nevertheless, such person is engaged in business as a lessor of real properties, hence, embraced by the proviso "habitually engaged in the real estate business." In applying the above-cited ruling to the case at bar, the disposition of foreclosed properties qualifies the bank to be habitually engaged in the real estate business and therefore any gain derived therefrom shall be subject to creditable withholding tax prescribed in Section 2.57.2(J) of the Revenue Regulations No. 2-98. LexLib 3. Section 229 of the Tax Code of 1997 provides that "No suit of proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. "In any case, no suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment; . . ." It is a cardinal rule in taxation that claims for tax refund are construed in strictissimi juris against the taxpayer as it partakes the nature of exemption from tax and it is incumbent upon the petitioner to show that it is entitled thereto under the law. In the absence of a showing that there is an error or illegality in the collection of the tax assessed on your previous payments, it is no doubt that you are not entitled to a tax refund. 4. In all events with respect to creditable withholding tax, the return shall be filed and payments should be made within ten (10) days after the end of each month except for taxes withheld for December which shall be filed on or before January 25 of the following year (Sec. 2.58(A)(2)(a) of Revenue Regulations No. 2-98). On the other hand, Section 200(B) of the Tax Code of 1997 provides that . . ., the tax return prescribed in Section 200 of the said Code shall be filed within ten (10) days after the close of the month when the taxable document was made, signed, issued, accepted, or transferred, and the documentary stamp tax thereon shall be paid at the same time the aforesaid return is filed. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group