CPAR Realty Corporation

August 5, 2008 BIR RULING [DA-(C-024) 108-08] Secs. 27 (D) (5); 248, 249; RR 4-2007; DA-665-06; 219-05; 024-01 CPAR Realty Corporation 1949 Kasoy St. corner Amorsolo St. Dasmarias Village, Makati City Attention: Atty. Orlie A. Elauria Legal Counsel Gentlemen : This refers to your letter dated May 20, 2008 requesting for confirmation of your opinion that STDEcA 1. The transfer of the three (3) real properties from PNB Management and Development Corporation to CPAR Realty Corporation which are vacant and/or idle and never used in its trade or business, nor subjected to depreciation, nor included in its stock in trade or inventory, nor held primarily for sale or lease to customers in the ordinary course of its trade or business, and never rented out to any one since its acquisition, are considered as capital assets subject to 6% capital gains tax and 1.5% documentary stamp tax but exempt from the 12% value-added tax; 2. The basis for the computation of capital gains tax and documentary stamp tax should be the redemption price stated in the Certificate of Redemption; and 3. The reckoning period for the payment of the capital gains tax and documentary stamp tax on the transfer of the Properties should be computed from the date the decision affirming the sale of the Properties has became final and executory. CSHcDT The facts, as represented, are as follows: PNB Management and Development Corporation ("PNB Madecor") is the registered owner of three (3) parcels of land covered by Transfer Certificate of Title (TCT) Nos. 87881, 87882 and 87883 of the Registry of Deeds of Quezon City (collectively, the "Properties"). On May 24, 2002, the Sheriff of the Regional Trial Court (RTC), Branch 38, Manila, pursuant to an Order of the Court dated April 18, 2002 in the case entitled "Gerardo Uy vs. Pantranco North Express, Inc." docketed as Civil Case No. 95-726825 sold on execution the Properties to satisfy a final judgment in favor of Gerardo Uy. During the execution sale, the highest bidder of the Properties was a certain Mr. Richard Tan for which he bid the amount of P15,100,000.00, as total price for the sale of the Properties. The Certificate of Sale was inscribed on the titles of the Properties. It must be pointed out that the Properties have never been developed or used by PNB Madecor in the ordinary course of its trade or business. From the time of their acquisition until they were transferred, the Properties had remained vacant and idle. PNB Madecor was indebted to Pantranco North Express, Inc. ("PNEI"). Prior to the execution, a writ of execution was obtained by Mr. Gerardo Uy against PNEI but resulted only in a partial implementation prompting Mr. Uy to go after leviable properties of PNEI in the possession of third parties. A "Notice of Garnishment" was issued in particular to attach the debt of PNB Madecor to PNEI. After a drawn-out litigation that ended in the hallowed halls of the Supreme Court in G.R. 129598, the writ of execution against PNB Madecor to the extent of its debt to PNEI was upheld. On April 18, 2002, RTC Branch 38, Manila issued an order declaring that the execution sale of the levied properties of PNB Madecor could already proceed. PNB Madecor, as the registered owner of the Properties, questioned the validity of the auction sale and sought its annulment. TIHDAa On February 19, 2003, Philippine National Bank ("PNB") anchoring its right of redemption on the fact that it is the pledgee of the shares of stock in PNB Madecor that are owned by Mega Prime Realty & Holdings Corporation, filed a Notice and Offer of Redemption and Tender of Redemption Money, with a manager's check of P16,987,941.80 payable to the winning bidder, Mr. Richard Tan. On the other hand, CPAR Realty Corporation ("CPAR") filed on March 28, 2003, with the trial court, a Manifestation of Conditional Redemption (with Motion to Hold Release of Redemption Amount), as assignee of PNB Madecor, by virtue of a Deed of Assignment dated March 25, 2003, whereby PNB Madecor assigned and transferred to CPAR all its rights and interest over the Properties, including the right to redeem the same and have the title consolidated under its name. CPAR manifested that as the assignee of PNB Madecor of its right to redeem, it was consigning the redemption money of P17,667,459.48 to effect the conditional redemption of the properties, subject to the final determination of the legal issues pertaining to the validity of the auction sale and the prior redemption of PNB. DEICaA Acting on CPAR's Manifestation, the trial court issued an Order dated May 9, 2003, approving the redemption money of CPAR and holding it in custodia legis, subject to the outcome of the issues of the validity of the auction sale and the prior redemption of PNB. Meantime, the Court of Appeals, in CA-GR SP No. 70624, dismissed PNB Madecor's petition to annul the auction sale. The Supreme Court, in G.R. No. 160221, also denied with finality PNB Madecor's petition for review. The Court of Appeals, in CA-GR SP No. 90466, also dismissed PNB's petition to cancel the new certificate of redemption in favor of CPAR. The issue has been finally put to rest when the Supreme Court denied with finality PNB's petition for review in G.R. No. 177856. As of November 27, 2007, the Entry of Judgment was issued, thereby the decision of the Supreme Court in G.R. No. 177856 affirming the validity of the redemption made by CPAR became final and executory. Since the validity of the auction sale and CPAR's redemption have been upheld and settled with finality, CPAR is now consolidating titles of the Properties under its name. In reply thereto, please be informed as follows: The subject Properties which are remained idle and undeveloped, not primarily held for sale or lease in the ordinary course of business and never used in its trade or business are considered as capital assets, thus, the sale/transfer thereof to CPAR shall be subject to the 6% capital gains tax (CGT) and 1.5% documentary stamp tax (DST), but exempt from the 12% value-added tax (VAT). Section 27 (D) (5) of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 7-2003, provides "(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." IAEcCa It is undisputed that the yardstick for determining whether the property is capital asset or ordinary asset is the actual use of the said property. Thus, if the property is not actually used in trade or business of the taxpayer, whether or not connected with his trade or business, or not held for lease or sale to customers, it will be classified as a capital asset. Moreover, if the property is merely held for investment purposes and remains vacant and idle, it is deemed a capital asset. This is fortified in BIR Ruling No. 014-2003 dated October 28, 2003, where this Office ruled that "It is apparent under the foregoing provision that for a property to be considered an ordinary asset it must be actually used in the business of the corporation. Accordingly, on the condition that Wendell Holdings Co., Inc. is not habitually engaged in the real estate business as represented, the property under consideration is a capital asset. The property was neither held primarily for sale to customers nor actually used in the business of Wendell Holdings Co., Inc. . . . The property is not actually used in the business of Wendell Holdings Co., Inc. as it has remained idle and undeveloped. Therefore, the sale of the property under consideration is a sale of a capital asset, not an ordinary asset. As such, the transaction is subject to capital gains tax of 6% under Section 27(D)(5) and not to the creditable withholding tax." DcAaSI In the instant case, the aforementioned Properties of PNB Madecor are properly classified as capital assets. The said Properties, as represented, are idle, unproductive and unimproved since the time of acquisition. Likewise, PNB Madecor never used said realties in its business operations nor did it form part of its inventory of properties for lease. Consequently, the sale or transfer of said Properties is subject to the capital gains tax (CGT) imposed under Section 27 (D) (5) of the 1997 Tax Code, as amended, and also subject to documentary stamp tax (DST) imposed under Section 196 of the same Code. Corollary thereto, Section 14 (B) (p) (1) of Revenue Regulations No. 4-2007, amending Section 4.109-1 (B) (p) (1) of Revenue Regulations No. 16-2005, implementing Republic Act No. 9337 (Reform VAT Law), provides "(p) The following sales of real properties are exempt from VAT, namely: (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer's main business." DaESIC The term "primary" is defined as 'first, principal, chief, leading or first in order of time, or development, or intention' (Black's Law Dictionary, Sixth Edition). Thus, to be 'held primarily for sale or lease', the property must be held with the chief intention of being sold or leased. In VAT Ruling No. 012-02, it was held that the sale of properties of MGM Motor Trading, Inc. is not subject to VAT since the properties sold were neither primarily held for sale to customers nor for lease in the ordinary course of its trade or business. Also in BIR Ruling No. DA-665-06, dated November 14, 2006, the BIR has ruled that sale of real properties of Benson Realty & Development Corporation, which are not primarily held for sale to customers in the ordinary course of trade or business nor included as part of its inventory of property for lease, is not subject to the 12% VAT. Likewise, in DA-685-06, dated November 30, 2006, it was reiterated that the sale of real properties of Union Ajinomoto Realty Corporation, not being used in the ordinary course of its trade or business, is not subject to the 12% value-added tax. Accordingly, as the Properties under consideration were neither primarily held for sale or for lease to customers nor actually used in the ordinary course of trade or business of PNB Madecor, the sale thereof is exempt from the 12% value-added tax (VAT) pursuant to Section 14 (B) (p) (1) of Revenue Regulations No. 4-2007, implementing Republic Act No. 9337. Moreover, the auction sale of the subject Properties being involuntary and forced upon only on the seller to enforce and/or satisfy a court judgment and, therefore, it cannot be said to have been conducted in the course of the taxpayer's trade or business, the gross receipts derived from the sale of the Properties is not subject to VAT. (BIR Ruling Nos. DA-219-2005 dated May 5, 2005; DA-024-2001 dated February 26, 2001 and DA-397-2000 dated November 20, 2000). The basis for the computation of capital gains tax and documentary stamp tax shall be the redemption price/cost as stated in the Certificate of Redemption. In BIR Ruling No. 259-92 dated September 9, 1992, wherein the taxpayer sought clarification whether the ownership over a certain property can be validly transferred to the "assignee-transferee" by virtue of certificate of redemption pursuant to the Deed of Assignment executed by the registered owner ("assignor-transferor") in favor of the "assignee-transferee", this Office had the occasion to rule that: "Yes, ownership can be validly transferred to the Spouses Jimmy & Lilia Bassig by virtue of certificate of redemption pursuant to the Deed of Assignment executed by the registered owners, Spouses Manaog in their (assignee, Spouses Bassig) favor, considering that in such event the property redeemed shall be considered as property of the assignee and can no longer be subject to execution under a judgment exclusively affecting the personal liability of the assignor as debtor mortgagor. (LRC Consulta No. 38, Register of Deeds of Iloilo, pet., April 12, 1955). Hence, the assignor, Spouses Manaog, shall be subject to the capital gains tax imposed under Section 21(e) of the Tax Code, as amended. On the other hand, in exercising its assigned right to redeem the aforesaid realty, the assignee, Spouses Bassig is not subject to income tax. IcHTED Moreover, the deed of redemption, in the instant case, is subject to the documentary stamp tax imposed under Section 196 of the Tax Code since a conveyance of real property from the assignor, Spouses Manaog, as seller, to the assignee, Spouses Bassig, as purchaser, is deemed to have taken place." Verily, as shown in the Sheriff's Certificate of Redemption, the redemption price of P17,667,459.48, including other costs, charges and interests directly related thereto, if any, which the seller is directly liable but assumed by the buyer, is the consideration or value received or paid for the Properties. Hence, this Office hereby confirms your opinion and hereby holds that the redemption money of P17,667,459.48 is the amount that should be taken into account in the computation of the capital gains tax and documentary stamp tax due on the transfer of the Properties. The period for the payment of CGT and DST is computed from the date the decision affirming the auction sale has became final and executory. Anent your opinion that the reckoning period for the payment of the capital gains tax and documentary stamp tax on the transfer of the Properties should be computed from the date the decision affirming the validity of the auction sale and validity of CPAR's conditional redemption of the Properties has become final and executory, this Office in BIR Ruling No. DA-339-00 dated September 11, 2000 had the occasion to rule that "Finally, we now pass upon the issue of penalties and interest for the late payment of taxes. The rule in extra-judicial foreclosure sale is that before the expiration date of the redemption period, the vendee's right to possession of the property is contingent upon the failure of the mortgagor to redeem. After the redemption period is terminated, the right to redeem is barred, and the mortgagor is divested of his rights to the mortgaged property sold. Thus, from that time, the vendee's right of possession of the property becomes final. In the instant case, it is clear that the right Rolando S. Abadilla, Jr. to the possession of the aforesaid property became final only when the decision promulgated by the Supreme Court on November 25, 1996 became final and executory on January 10, 1997. Accordingly, since it would be unjust to impose a tax and/or the corresponding penalties thereto to a person where there is still uncertainty as to whether or not his rights and title over a certain property is valid, the applicable time for the payment of the capital gains tax and the corresponding documentary stamp tax should be reckoned from January 10, 1997. However, inasmuch as Rolando S. Abadilla, Jr. failed to pay the said taxes on time, this Office is of the opinion, as it hereby holds, that the penalties and interest imposed under Sections 248 and 249 of the Tax Code of 1997 should be computed from the due date for payment of the taxes ( i.e., capital gains tax 30 days from January 10, 1997; documentary stamp tax within 1 day from January 10, 1997) until the total taxes are fully paid. EaHcDS Applying the foregoing precept in the present case, CPAR's redemption of the Properties became absolute only when the decision of the Supreme Court in G.R. No. 177856 became final and executory on November 27, 2007. Hence, the capital gains tax should have been paid thirty (30) days from November 27, 2007 or until December 27, 2007 and the corresponding documentary stamp tax shall be paid within five (5) days after the close of the month when the decision became final and executory, or on or before December 5, 2007 (Revenue Regulations No. 6-2001). However, inasmuch as CPAR paid the corresponding CGT and DST only on February 28, 2008, penalties and interest imposed under Sections 248 and 249 of the Tax Code, as amended, should be computed from the due date for payment of the taxes ( i.e., capital gains tax 30 days from November 27, 2007 or December 27, 2007 until February 28, 2008; documentary stamp tax from December 5, 2007 until February 28, 2008). This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, however, it is disclosed that the facts are different, then this ruling shall be considered null and void. EAcIST Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service