BIR Ruling [DA-301-04]

June 1, 2004 BIR RULING [DA-301-04] 27 (D) (5); 39 (A) (1), RR 7-2003 DA-060-2003 Red Ribbon, Inc. 84 E. Rodriguez, Jr. Ave. Libis, Quezon City Attention: Mr. Bassanio M. Magnanao Finance Officer Gentlemen : This refers to your letter dated July 24, 2003 requesting for a ruling on the tax consequences of the sale of your real properties covered by Transfer Certificates of Title Nos. 69907, 66194 and 66195 all located in Cubao, Quezon City. Based on the representations and documents submitted, it appears that Red Ribbon is the registered owner of three (3) parcels of land situated in Quezon City which were never been used in business for almost 11 years now since its acquisition in October 1992 and had remained vacant until now; that the primary purpose of Red Ribbon is to carry on the business of operating a bakeshop, coffee shop, refreshment parlor and baking, manufacturing and producing, dealing in, buying, selling and distributing all kinds of goods, chattels and commodities which are or may be the subject of commerce such as but not limited to cakes, pastries, bread and candies; and that you are now planning to sell the aforesaid parcels of land. In reply, please be informed the term "capital asset" 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. AcHEaS Furthermore, in applying the provisions of Revenue Regulations (RR) No. 7-2003, particularly Section 3(e) thereof, which provides to wit: "SEC. 3. GUIDELINES IN DETERMINING WHETHER A PARTICULAR REAL PROPERTY IS A CAPITAL ASSET OR ORDINARY ASSET. xxx xxx xxx e. Treatment of abandoned and idle real properties . xxx xxx xxx. Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2 (g) hereof are automatically converted into capital assets upon showing of proof that the same have not been used for more than two (2) years prior to the consummation of the taxable transactions involving said properties." (Emphasis supplied.) real properties owned by taxpayers not engaged in the real estate business or referring to those persons other than real estate dealers, real estate developers and/or real estate lessors, and those taxpayers deemed to be engaged in the real estate business whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business, shall, upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving the said real properties, and though classified as ordinary assets, be automatically converted into capital assets. In view of the foregoing, and considering that Red Ribbon, Inc. is a taxpayer not engaged in the real estate business , being not a real estate dealer, developer or lessor and whose primary purpose is to carry on the business of operating a bakeshop; and that the aforementioned properties had already been idle and vacant since October 1992 and had not been used in the ordinary course of trade or business, it is the considered opinion of this Office that the income derived from the sale thereof is not subject to the creditable withholding tax (expanded) under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended, but to the capital gains tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Sec. 6(E) of the Tax Code of 1997, whichever is higher, of such land and/or buildings pursuant to Sec. 27(D)(5) of the same Code. Finally, the deed of sale conveying the above-mentioned parcels of land shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of the same Code, whichever is higher. DaEcTC 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