Chato & Vinzons-Chato Law Offices

February 6, 2009 BIR RULING [DA-(C-021) 070-09] Sec. 27 (D) (5); RR 7-2003; DA (C-102) 324-2008 dtd. 10/22/08 Chato & Vinzons-Chato Law Offices 8/F Strata 2000, F. Ortigas Jr. Road Ortigas Center, 1605 Pasig City Attention: Atty. Esther R. Ibaez Consultant Gentlemen : This refers to your letter dated December 16, 2008, in behalf of your client, WINPLAZA DEVELOPMENT CORPORATION, requesting a confirmation of your opinion that your client's sale of two (2) parcels of land is subject only to the six percent (6) capital gains tax as these are its capital assets pursuant to Section 27 (D) (5) of the Tax Code of 1997. It is represented that WINPLAZA DEVELOPMENT CORPORATION (WINPLAZA, for short) is a stock corporation registered with the Securities and Exchange Commission (SEC) on October 23, 1996; that it was principally organized to engage in the business of improving and developing real or personal properties as well as constructing and equipping buildings, docks, harbors, piers, wharves, canals, drainage, streets, parks, bridges and other works; that in 1997, WINPLAZA acquired two (2) parcels of land located at A. Linao St., Malate, Manila, consisting of 1,774 square meters and 20,904 square meters covered by TCT Nos. 234223 and 234224 respectively, both of the Registry of Deeds for Manila; that from thereon, it no longer had any corporate activity; that on March 15, 2004, its registration with the SEC was automatically revoked by the said Commission due to non-filing of reportorial requirements; that however, the Order of Revocation of Registration was set-aside by SEC upon full compliance with the reportorial requirements in an Order dated November 27, 2008; that upon its reinstatement to corporate existence, it decided to sell the said properties which were in its books properties not included as part of its inventory in the real estate business; that WINPLAZA neither offered for sale nor used them in its trade or business, neither was it subjected to depreciation; that documents submitted disclosed that WINPLAZA did not start commercial operation from its inception as in fact from 1997 to 2007, it did not file any reportorial requirements with the SEC, neither did it file any return with this Office (BIR) as evidenced by a no operation return filed last December 2007, in its compliance with the conditions for its corporate reinstatement; that it appears that the only corporate activity it undertook was in 1997 when it acquired the two (2) parcels of land; that the properties remained idle and vacant as there is no existing improvement thereon nor an improvement had ever been introduced into it since its acquisition, as per certification issued by the Office of the City Assessor-City of Manila; that it had not been leased out to anybody. 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 land 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. ADCETI On the other hand, under Section 39 (A) (1) of the Tax Code of 1997, as amended, the term "capital assets" is negatively defined as property held by the taxpayer (whether or not connected with his trade or business) by 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 WINPLAZA never commenced commercial operations since its incorporation and in fact its corporate registration had been automatically revoked by SEC, the subject property registered under WINPLAZA's name, is properly treated as capital assets. The said real property classified as "investment property" 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 1997 Tax Code, as amended, and of Revenue Regulations No. 7-2003, are classified as capital assets (BIR Ruling No. DA-152-2004 dated March 31, 2004 cited in BIR Ruling No. DA-270-04 dated March 17, 2004). The sale by WINPLAZA of said property 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 WINPLAZA treated as capital assets are not subject to the 12% 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. 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