BIR Ruling [DA-481-03]

December 10, 2003 BIR RULING [DA-481-03] S. 27 (D) (5); 021-99/2-25-99 Cayanga, Zuniga & Angel 2nd Floor, One Corporate Plaza, 845 Pasay Road, Legaspi Village, Makati City Attention: Atty. Cherry Marie A. Madrid Gentlemen : This refers to your letter dated February 8, 2002 requesting for a ruling with respect to the conversion of the classification of a real property from an ordinary asset of a corporation to a capital asset. The facts, as you represented, are as follows: Plymouth Realty Development Corporation (Plymouth Realty for brevity) is a corporation registered on July 10, 1978 with the Securities and Exchange Commission (SEC for brevity) under SEC Reg. No. 80293 primarily engaged in the real estate business. On June 4, 1999, Plymouth Realty amended its Articles of Incorporation by changing its corporate name to Plymouth Trading Resources, Inc. (Plymouth Trading for brevity) and further amending its primary purpose to the trading of goods and general merchandise. On January 3, 2002, SEC approved the said amendments and issued to Plymouth Trading a Certificate of Filing of Amended Articles of Incorporation. Prior to the amendment of its Articles of Incorporation, the primary purpose of Plymouth Realty as stated in its Articles of Incorporation is as follows: "SECOND: That the primary purpose for which the corporation is formed is to operate a general real estate business , to purchase, or in any way acquire for investment or for sale or otherwise, lands, buildings, improvements and any interest therein and to sell, convey, lease, mortgage or otherwise deal with all or any part of the property of the corporation, and in general, to have and exercise all powers rights and privileges necessary and incident to carrying out properly the foregoing objects." (Emphasis supplied.) In the course of its business and pursuant to its primary purpose, Plymouth Realty dealt and acquired several real properties, including a parcel of land located at Cainta, Rizal, and covered by Transfer Certificate of Title No. 497194 of the Register of Deeds of Rizal. The said property, among others, was acquired by Plymouth Realty sometime in 1978 and held by the corporation primarily for sale to whoever was interested in acquiring the same in the ordinary course of its trade or business. At the time Plymouth realty ceased its operation sometime in 1986, all its other properties were sold except the lot covered by said Certificate of Title. SCIacA As stated, Plymouth Realty amended its Articles of Incorporation with regard to its name and primary purpose. Thus, its primary purpose, as amended, reads as follows: "SECOND: That the primary purpose of this Corporation is to engage in the business of trading of goods such as general merchandising on wholesale basis ." (Emphasis supplied.) It is now your position that with the change in the corporate profile of the Corporation from Plymouth Realty to Plymouth Trading, the subject parcel of land has been converted into a capital asset of Plymouth Trading. In reply, please be informed that in BIR Ruling No. 021-99 dated February 25, 1999 wherein the corporation involved had amended its primary purpose from a realty corporation to a trading corporation, this Office opined that: ". . . under Section 27(D)(5) of the Tax Code of 1997, a final tax of six percent (6%) is imposed on the gains presumed to have been realized in the sale, exchange or disposition of lands and/or buildings which are not actively used in the business of a corporation and which are treated as capital assets 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. Such being the case, this Office is of the opinion as it hereby holds that the aforementioned real properties . . . may qualify as capital assets, and the sale thereof may be subject to the final tax of six percent (6%) based on the gains presumed to be realized from the sale, pursuant to Section 27(D)(5) of the Tax Code of 1997 . . ." Applying the foregoing precept, this Office opines and so holds that the subject parcel of land is considered a capital asset. Its sale, therefore, shall be subject to the 6% capital gains tax under Section 27(D)(5) of the Tax Code of 1997 and documentary stamp tax under 196 of the same Code, both based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher, subject to the condition that Revenue District Office having jurisdiction over the properties, shall conduct, an ocular inspection to determine whether or not the properties are being used in trade or business. The report of findings on the ocular inspection shall be submitted by the duly authorized Revenue Officer to the said Revenue Office at the time that the taxpayer files the corresponding tax return and pays the tax due thereon. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group