BIR Ruling [DA-542-06]

September 11, 2006 BIR RULING [DA-542-06] Sec. 27 (D) (5); RR 7-2003; DA-219-2005 Malabon Realty and Development Corporation 2600 Legarda Street Sampaloc, Manila Attention: Mr. Francisco V. Cayco Trustee Gentlemen : This refers to your letter dated August 1, 2006 requesting a ruling on the applicability of the provisions of Sec. 27 D(5) of the Tax Code of 1997, as amended, on the sale by the stockholders of Malabon Realty and Development Corporation ("MAREDECO") of the real properties registered under its name. The facts as represented are as follows: MAREDECO was a domestic corporation established under the laws of the Republic of the Philippines on May 6, 1968. Its primary purpose was to engage in the realty business. It was dissolved on June 30, 1981. Prior to its dissolution, MAREDECO acquired real properties in Kalookan, Malabon and Tondo as part of its investments supposedly intended for speculation as to the later appreciation of real estate values. MAREDECO, however, had never commenced commercial operation since the time of its incorporation, thereby leaving the above acquired properties idle, unproductive and unimproved. Due to the dissolution of MAREDECO, it has been decided by its incorporators to dispose of the idle properties of the corporation converting the same to cash assets for convenience in the distribution of the same in the process of liquidation and also, due to the lack of interest of the stockholders to maintain the same, for the reason that they are spending a huge amount of money paying real estate taxes rather than benefiting from said properties. The stockholders of MAREDECO had managed to dispose of some of its assets in the years 2000, 2002 and 2003. The stockholders of MAREDECO intend to sell the real properties covered by Transfer Certificate of Title Nos. 322088, 322089, 322090, 322091 and 322092, all of the Registry of Deeds of Kalookan City and registered under the name of MAREDECO. In connection therewith, it is your position that the above real properties should be classified as capital assets and the sale thereof subject to the 6% capital gains tax, based on the following grounds, to wit: 1) MAREDECO, although engaged in the real estate business, has not commenced operation of its business and was dissolved on June 30, 1981; 2) It has held the above properties primarily as investments; 3) The properties had been idle, unproductive and unimproved since the time they were acquired by MAREDECO; and 4) The properties never formed part of MAREDECO's inventory of properties for sale as it has never commenced operation. In support of your request, you are submitting the following documents: 1. Corresponding Transfer Certificates of Title; 2. Corresponding Tax Declarations; 3. Certificate of Corporate Information from the Securities and Exchange Commission (SEC) issued on August 30, 2006, certifying that MAREDECO has been dissolved already by shortening its term of existence effective on June 30, 1981; 4. Amended Articles of Incorporation showing the shortened term of existence of the corporation; and 5. Letter from Revenue District Office No. 32, Quiapo-Sampaloc-Sta. Mesa-San Miguel, Manila, showing the activities of MAREDECO and the tax types of its transactions with the latter for the years 2000, 2002 and 2003. In reply, please be informed that under Section 27(D)(5) of the Tax Code of 1997, as amended, a final tax of six percent (6%) is imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings." TCIHSa On the other hand, under Sec. 39 (A)(1) of the 1997 Tax Code, as amended, the term "capital assets" is negatively defined as property held by the taxpayer (whether or not connected with his trade or business) but does not include (i) 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 (ii) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or (iii) 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 (iv) real property used in trade or business of the taxpayer. Considering that MAREDECO has long been dissolved and that it had never commenced commercial operations since its incorporation, the subject real properties registered under MAREDECO's name, are properly treated as capital assets. The said real properties classified as "investment properties" which are idle, unproductive and unimproved since the time of acquisition, and do not fall under any of the assets enumerated under Section 39(A)(1) of the Tax Code of 1997, as amended, and of Revenue Regulations No. 7-2003, are classified as capital assets (BIR Ruling DA-152-2004 dated March 31, 2004 cited in BIR Ruling No. DA-270-04 dated March 17, 2004). The sale by the incorporators of said properties in furtherance of MAREDECO's liquidation, therefore, is subject to the 6% capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997, as amended. Moreover, the sale of the above properties of MAREDECO treated as capital assets is not subject to the 10% value-added tax imposed under Section 106 of the Tax Code of 1997, as amended. However, it is subject to the 1.5% documentary stamp tax imposed under Section 196 of the same Code. CDAHIT 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service