BIR Ruling [DA-(C-061) 213-09]

April 24, 2009 BIR RULING [DA-(C-061) 213-09] Sec. 39; 27-02 dated July 3, 2002 Social Housing Finance Corporation Banco de Oro Plaza, 8737 Paseo de Roxas Makati City Attention: Atty. Fermin T. Arzaga President Gentlemen : This refers to your letter dated July 23, 2008, wherein you requested for confirmation of your opinion that real properties acquired by Social Housing Finance Corporation (SHFC) through foreclosure are considered as ordinary assets and, therefore, not subject to capital gains tax when it sells or disposes the same to the public. As represented, the facts are as follows: SHFC is a government owned and controlled corporation created under the Corporation Code mandated by law to undertake housing programs that caters to the formal and informal sectors in the low-income and impoverished bracket, and is charged with the development and administration of low-cost and social housing programs schemes. One of its housing program is the "Abot Kaya Pabahay Fund" (AKPF) Program, a loan assistance program which serves as a seed money for the development of the property and construction of housing units thereon. This developmental loan, which is usually availed by landowners and real estate developers, is secured by a real estate mortgage constituted on the property to be developed. In the exercise of its foreclosure rights under the real estate mortgage agreements, SHFC obtains and possesses properties by means of initiating extrajudicial foreclosure proceedings against the collateral properties and participating in the court-assisted public auction sale. The primary purpose of SHFC, as enunciated in its Articles of Incorporation is as follows: SCDaET "1. To promote land ownership giving priority to the underprivileged and homeless citizens of the society. xxx xxx xxx 5. To purchase, acquire, sell, discount, refinance or otherwise deal in community or home mortgages or participate therein or engage in estate management under such conditions and terms as may be determined by the Board of Directors of the Corporation." Based on the foregoing, you are of the opinion that all real properties acquired by SHFC through foreclosure proceedings were pursuant to its primary purpose of dealing in community home mortgages so that these acquired assets are considered as "ordinary assets" under Section 39 (A) (1) of the National Internal Revenue Code of 1997 since these acquired assets will be included in the inventory of SHFC at the close of the taxable year. Also, these acquired assets will probably be sold to another social housing program beneficiaries pursuant to its legislative mandate under Executive Order No. 272, otherwise known as the law, "Authorizing the Creation of the Social Housing Finance Corporation and Directing the Transfer of the Community Mortgage Program, Abot-Kaya Pabahay Fund program, and other Social Housing Powers and Functions of the National Home Mortgage Finance Corporation to the Social Housing Finance Corporation" which provides: "The SHFC shall be the lead government agency to undertake social housing programs that will cater to the formal and informal sectors in the low-income bracket and shall take charge of developing and administering social housing program schemes, particularly the CMP and AKPF Program (amortization support program and developmental financing program)." The real properties acquired by SHFC in foreclosure proceedings are primarily intended for sale to the public. In reply, please be informed that whenever a taxpayer sells real properties forming part of its inventory for sale or for lease to customers, it is considered as a sale of ordinary assets subject to income tax pursuant to Section 27 (A) of the 1997 Tax Code. However, when the real estate involved has never formed part of its inventory for sale/lease or being offered for sale/lease, or has not been otherwise used in its trade or business as evidenced by the fact that it has remained idle, raw and undeveloped, 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 thereof pursuant to Section 27 (D) (5) of the 1997 Tax Code. The character of the real property involved in the transaction must primarily be determined, i.e., whether or not it is capital or ordinary asset, prior to the application of the appropriate tax rates. Under Section 39 (A) (1) of the 1997 Tax Code, the term "capital asset" 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 or lease to customers in the ordinary course of trade or business; or (iii) property used in 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 (BIR Ruling No. 27-02 dated July 3, 2002) Thus, if the real property is a land or building which is not actually used in business of the seller and is treated as a capital asset, as that term is defined in Section 39 (A) of the 1997 Tax Code, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the Tax Code of 1997, whichever is higher, of such land and/or building. This rule applies, whether or not the seller is engaged in real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, shall apply. Consequently, only such real properties held primarily for sale or lease to customers in the ordinary course of business, or which would be properly included in the inventory of such taxpayer if on hang at the close of the taxable year, or used in his trade or business, are properly classified as ordinary assets. Otherwise stated, real properties other than those enumerated under Section 39 (A) (1) of the Tax Code of 1997 and Section 2 (b) of Revenue Regulations No. 7-2003 are properly deemed as capital assets. ECcaDT From the foregoing and based on your representation that all properties acquired by SHFC are included in its inventory at the close of the taxable year and are primarily intended for sale to the public, this Office hereby rules that SHFC's acquire assets are considered as ordinary assets. Accordingly, the sale of the said properties classified as ordinary assets is exempt from the capital gains tax imposed under Section 27 (D) (5) of the 1997 Tax Code, as amended, but subject to the expanded withholding tax under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, and to the documentary stamp tax imposed under Section 196 of the same Code, based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the 1997 Tax Code, whichever is higher. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service