BIR Ruling [DA-496-99]

September 2, 1999 BIR RULING [DA-496-99] Atty. Francisco B. Gonzalez 429-D Shaw Boulevard Mandaluyong City Gentlemen : This refers to your letter dated August 27, 1999 stating that (1) Miranda Bros. Investments & Trading Corporation (MBITC) [formerly Poly Knitting Corporation] was established under the laws of the Philippines on February 10, 1971; (2) MBITC pursuant to their new purpose as an investments and trading corporation engaged in the activity of buying and selling shares of stock and other securities in 1974 and ceased operations as a garments manufacturer; (3) On September 5, 1989, MBITC acquired a parcel of land located along Shaw Boulevard corner Acasia Lane, Mandaluyong from Mercantile House Corporation under TCT No. 1470 issued by the Registry of Deeds for Mandaluyong and then under TCT No. 2639 containing an area of 1,302 square meters and in which exists an improvement more particularly, a Caltex Gasoline Station, which had a continuing lease contract from: (a) Lease in favor of Caltex (Philippines, Inc.) Lessee, for a term 10 years beginning August 15, 1956, subject to renewal for a further period of Ten years with the previous owners of the Property, Ms. Evelyn Villalon; (b) Renewal of lease for ten (10) years commencing from and after October 1, 1976 with the previous owner Juan G. Fabella, under TCT No. 56828; (c) An entry was also made in TCT No. 1470 that an adverse claim was filed by Caltex Corporation claiming that it has rights and interest over the property, this was also copied from TCT No. 24035/T-121 when the property still belonged to Intercity Realty & Development Corporation; (d) A cancellation of the adverse claim filed by Caltex corporation was entered into TCT No. 1470, pertaining to letter c, stating among others that the annotation inscribed on August 30, 1989 under Entry No. 910 is no longer necessary, hence it is deemed cancelled; (e) A final entry was made on September 7, 1989 referring to the sale of the said property to MBITC pursuant to an instrument of sale dated September 5, 1989; (4) The cancellation pertaining to letter 3.d was due to the fact that another lease contract was executed with another entity which was to operate the Caltex Station in the same area which was believed to have started on October 1, 1986 for a period of six years terminating on September 31, * 1992, by which time the owner of the said property was already MBITC pursuant to letter 3.e above; (5) The lease contract specifically paragraph 4 thereof states: "(4) IMPROVEMENTS AND REMOVAL OF PROPERTY: Lessee shall have the right to erect on the leased premises any buildings or structures that it may desire without the consent or approval of lessor. No buildings, improvements, fixtures, and equipment erected, installed or owned by the lessee shall become part of the real estate, but shall be and will remain the property of the lessee. Lessee shall also have the right at any time during the continuance of this lease, or within thirty (30) days after its termination, to abandon, sever and remove any or all fixtures, equipment, improvements and other property of lessee placed on said premises by lessee during the term of this or any previous lease, or any extension or renewal thereof." (6) MBITC was interested in acquiring the property for the purpose of acquiring the land as a capital asset, the same agreed to respect the lease entered into by the prior owner which sold the property to MBITC on September 5, 1989, at which time MBITC was purely engaged in the activities of buying and selling securities; (7) Upon the expiration of the lease of Caltex Corporation on October 1, 1992, Caltex Corporation, now known as Caltex (Phils.), Inc. negotiated with MBITC to further extend the lease because the same has been used by Caltex since 1956. MBITC which at the time was in the business of buying and selling securities agreed to a limited extension of six years effective October 1, 1992 to September 31, * 1998 without further provisions for extensions; LexLib (8) Prior to October 1, 1998, Caltex (Phils.), Inc. again sent a letter requesting for an extension of the lease contract to which MBITC, refused and insisted on the termination of the lease; (9) On October 1, 1998, the lease contract with Caltex (Phils.), Inc. was terminated and all existing structures thereon which was owned by Caltex was removed and no rental or income payments has been recovered on the said property up to present; (10) The said property was subdivided by MBITC to three (3) parcels of land covered by different transfer certificate of titles among which are TCT 14545 covering 586 square meters and TCT No. 14546 covering 442 square meters of the original property on December 14, 1998; (11) On August 4, 1999, after a period of almost 11 months from the expiration and termination of the extension lease contract, the said two (2) parcels of land were offered for sale to Mr. Peter Co Chua, Ms. Audrey Mae Koa Chua and Ms. Jaimee Lyn Koa Chua for and in consideration of P31,354,000.00; (12) That upon the execution of the Deed of Absolute Sale, MBITC filed a return for the payment of the capital gains tax due on the transaction for the amount of P1,881,240.00 representing 6% of the selling price of 31,354,000.00 and the pertinent documentary stamp tax due thereon in the amount of P470,310.00; and (13) The said payment was refused by the Revenue District Office of Mandaluyong on the ground that the same is real property owned by a corporation subject to the 7.5% creditable withholding tax. Based on the foregoing representations, you now request for a ruling classifying the above-mentioned parcels of land as capital assets, the sale of which shall be subject to the 6% final capital gains tax under Section 27(D)(5) of the Tax Code of 1997. In reply, please be informed that Section 27(D)(5) of the Tax Code of 1997 provides that 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. Corollarily, the term "capital assets" as negatively defined in Section 39(A) 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 43; or real property used in trade or business of the taxpayer. Such being the case, the above-mentioned parcels of land covering TCT Nos. 14545 and 14546 issued by the Registry of Deeds for Mandaluyong City may qualify as capital assets, and the sale thereof may be subject to the final capital gains tax of 6% based on the selling price or fair market value, whichever is higher pursuant to Section 27(D)(5) of the Tax Code of 1997. LibLex 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)