BIR Ruling [DA-665-06]

November 14, 2006 BIR RULING [DA-665-06] Sec. 27 (D) (5); DA-653 & 654-2006 Benrose Realty & Development Corporation No. 5 Sta. Ana Street, Magallanes Village Makati City Attention: Mr. Virgilio J. Calaguas External Auditor Gentlemen : This refers to your letter dated November 8, 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 BENROSE REALTY & DEVELOPMENT CORPORATION (BRDC for brevity) of its real properties. It is represented that BRDC is a domestic corporation established under the laws of the Republic of the Philippines. BRDC's primary purpose is to engage in the real estate leasing business. BRDC acquired real properties with improvements located in M. Adriatico Street, Malate, Manila, as part of its investments covered by Transfer Certificate of Title (TCT) Nos. 177557, 177558, 177559, 177560, 177561 and 177562. The above acquired properties are idle, unproductive and unimproved since the time of acquisition. They are booked as investment of the corporation and not as part of its inventory of properties for lease. The improvements found thereon are dilapidated and are deteriorated that BRDC has not renovated the same. BRDC decided to dispose the said idle properties of the incorporation converting the same to cash assets. It is your view that the above properties of BRDC should be classified as part of its capital assets and the sale thereof subject to the 6% capital gains tax, based on the following grounds, to wit: 1) BRDC has held the above properties primarily as investments; 2) The properties had been idle, unproductive and unimproved since the time they were acquired by BRDC; and 3) The properties never formed part of BRDC's inventory of properties for lease. ESHcTD In reply, please be informed that Section 27(D)(5) of the 1997 Tax Code, as amended, provides, viz.: "Sec. 27. Rates of Income Tax on Domestic Corporation . Capital Gains Realized from the Sale, Exchange, or Disposition of Lands and/or Buildings. A final tax of six percent (6%) is hereby 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." On the other hand, Sec. 39 (A)(1) of the same Code provides: " Capital Assets . The term "capital assets" 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 be properly 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." In BIR Ruling No. DA-219-2005 dated May 5, 2005, it was held that whenever a corporate-real estate developer sells real properties forming part of its inventory or those primarily held for sale to customers, it is considered as a sale of ordinary assets subject to the 32% income tax. However, when the real estate involved is idle, raw, undeveloped, has never formed part of the real estate developer's inventory for sale to customers and has not been used in its trade or business, such real properties are properly classified as capital assets subject to a final tax of 6% on the gain presumed to have been realized from the sale or transfer pursuant to Section 27(D)(5) of the Tax Code of 1997, as amended. (Cited in BIR Ruling Nos. DA-653 & 654-2006, both dated November 7, 2006) In the instant case, the aforementioned real properties of BRDC are properly classified as capital assets because BRDC hold such properties as investments. The said properties are idle, unproductive and unimproved since the time of acquisition. Likewise, BRDC never used said realties in its business operations nor did they form part of its inventory of properties for lease. Accordingly, the sale of said real properties is subject to the capital gains tax imposed under Section 27(D)(5) of the 1997 Tax Code, as amended. Moreover, the sale of the above properties of BRDC, treated as capital assets, is not subject to the 12% value-added tax imposed under Section 106 of the 1997 Tax Code, as amended, in accordance with Sec. 4.109-1 (B)(p) of Revenue Regulations No. 16-2005, implementing Republic Act No. 9337. 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. HDTISa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service