BIR Ruling [DA-700-06]

December 13, 2006 BIR RULING [DA-700-06] 39 (A) (1); DA-420-05 ASB Land, Inc . 4th Floor St. Francis Square Doa Julia Vargas Avenue cor. Bank Drive Ortigas Center, Mandaluyong City Attention: Atty. Rolando P. Domingo Vice-President Gentlemen : This refers to your letter dated October 3, 2006 stating that ASB Land, Inc. (ASBLI) is a corporation organized and existing under and by virtue of the laws of the Philippines, with principal office at 114 Benavidez St., Legaspi Village, Makati City. ASBLI, as one of the corporations belonging to the ASB Group of Companies is under receivership and rehabilitation pursuant to the Securities and Exchange Commission (SEC) Order dated April 26, 2001. As part of its rehabilitation plan, ASBLI is enjoined to dispose its properties covered by Transfer Certificate of Title (TCT) Nos. N-207131, N-207132, N-207133, 123976 and 123978 all located at E. Rodriguez Avenue, Barangay Damayang Lagi, Quezon City, which remained abandoned and idle for the past three (3) years. The subject properties have been recorded in ASBLI's books as Investment in Real Estate from the time it was purchased up to the present. Based on the foregoing, you now would like to request for a ruling that the aforestated properties which have remained abandoned and idle for years can be considered a capital asset and that the sale of which is only subject to the 6% capital gains tax under Section 27(D)(5) of the 1997 Tax Code. In reply, please be informed that Section 39(A)(1) of the 1997 Tax Code, as amended, defines capital asset, to wit: "Sec. 39. Capital Gains and Losses . (A) Definitions . As used in this Title (1) 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 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." As stated above, capital assets do not include properties 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 real properties used in trade or business of the taxpayer. Considering that since the time of its acquisition the afore-stated properties have never been used by ASBLI in the ordinary course of its business and has remained vacant and idle and has never been held or owned primarily by ASBLI for sale to customers in the ordinary course of its trade or business nor has it ever been leased to anybody, then the subject properties are rightfully classified as a capital asset. On the other hand, Section 27(D)(5) of the Tax Code of 1997, as amended, provides: "SEC. 27. Rates of Income Tax on Domestic Corporations . (D) Rates of Tax on Certain Passive Incomes . (5) 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." EICSTa Furthermore, Section 109 (P) of Republic Act No. 9337 which amends certain provisions of the 1997 Tax Code provides, viz: "SEC. 109. Exempt Transactions . (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business . . ." Thus, based on the above-cited provisions of the Tax Code, the parcels of land covered by Transfer Certificate Title Nos. N-207131, N-207132, N-207133, 123976 and 123978 are capital assets in the hands of ASBLI and the intended sale thereof is subject to the 6% capital gains tax based on the gross selling price or fair market value, whichever is higher. However, the intended sale of the subject properties which are capital assets and therefore not primarily held for sale to customers or held for lease in the ordinary course of trade or business are exempt from the value-added tax. Finally, in BIR Ruling No. DA-420-05 dated October 10, 2005 (citing BIR Ruling DA-155-2005 dated April 14, 2005 and BIR Ruling DA 219-2005 dated May 5, 2005 among others), the BIR ruled that the subject realties of Union Ajinomoto Realty Corporation which have remained vacant, idle, unproductive and unimproved since the time of acquisition do not fall under any of the assets enumerated under Section 39(A)(1) of the Tax Code of 1997 and Section 2(b) of Revenue Regulations No. 7-2003 and are properly classified as capital assets; that the sale of the aforesaid properties which are classified as capital assets, is subject to capital gains tax at the rate of 6% on the gain presumed to have been realized from the sale or transfer; and that the sale of the said vacant and/or idle real properties, not being used in the ordinary course of the trade or business of UARC is not subject to the 10% value-added tax. 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 as null and void. DAHaTc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service