Atlantic, Gulf & Pacific Company of Manila, Inc.

May 22, 2009 BIR RULING [DA-(C-069) 245-09] 27 (D) (5); DA-578-2007; DA-290-2006 Atlantic, Gulf & Pacific Company of Manila, Inc. San Roque, Bauan, Batangas Attention: Mr. Marcial P. Morales, Jr. Vice President for Finance Gentlemen : This refers to your undated letter requesting for a confirmation of your opinion that the sale by Atlantic, Gulf & Pacific Company of Manila, Incorporated (AG&P) of its property which has long been idle and not used in business should be classified as capital asset and, therefore, subject to the 6% capital gains tax and 1.5% documentary stamp tax but exempt from the 12% value added tax under the Tax Code of 1997, as amended. It is represented that Atlantic, Gulf & Pacific Company of Manila, Incorporated, with principal office at the AG&P Special Economic Zone in San Roque, Bauan, Batangas, is a Philippine Economic Zone Authority (PEZA) registered enterprise; that it is engaged in design, detailing, fabrication and pre-assembly works of heavy steel structurals and allied services associated with commercial and industrial construction; AG&P is neither a real estate dealer nor a real estate developer and it has never engaged in the real estate business; that it is the registered owner of two (2) parcels of land, with improvements situated at Baguio City with a total land area of five thousand nine hundred ninety nine (5,999) square meters more or less and more particularly described under Transfer Certificate of Title No. T-3941, issued by the Land Registration Commission, Registry of Deeds of Baguio City; that the said property has not been used in trade or business nor held primarily for sale or lease to customers in the ordinary course of business and is primarily being held for anticipated increment of value or as an investment; that moreover, the financial restructuring of AG&P calls for the sale of the said idle property to any interested buyer; that it is worth mentioning that AG&P has been under court-supervised rehabilitation since January 2002, with the Regional Trial Court, Fourth Judicial Regions, Branch 2, Batangas City, as the Rehabilitation Court under Civil Case No. 7022, thus making its property idle since that date; that AG&P already filed its motion to exit rehabilitation and that a favorable ruling is expected sometime in April 2009. In reply, please be informed that 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, or such lands and/or buildings." 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, 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 capital asset, not an ordinary asset. As such, the transaction is subject to capital gains tax of 6% under Section 27(D)(5) and no to the creditable withholding tax." HcTEaA The phrase "taxpayers engaged in the real estate business" refers collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayer not engaged in the real estate business" shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of these Regulations. (Sec. 2 (g), Revenue Regulations No. 7-2003) Inasmuch as AG&P is not primarily engaged in real estate business but is engaged in design, detailing, fabrication and pre-assembly works of heavy steel structurals and allied services associated with commercial and industrial construction, it is deemed not engaged in the real estate business. Consequently, the sale of the aforesaid property is deemed a sale of capital asset subject to the 6% final capital gains tax but not subject to the 12% VAT. Moreover, real property, which is idle and vacant and had not been used in the ordinary course of trade or business nor had it ever been classified as property of a kind which would properly be included in the inventory if on hand at the close of the taxable year, nor had it ever been held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, the income derived from the sale thereof is not subject to the expanded withholding tax under Section 2.57.2 (J) of Revenue Regulations No. 2-98, but only to the 6% capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the same Code, based on the gross selling price or fair market value (FMV) as determined in accordance with Section 6 (E) of the Code, whichever is higher Lots or improvements, classified as "investment properties", 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 Tax Code of 1997, as amended, and 2 (b) of Revenue Regulations No. 7-2003 are classified as capital assets, the sale of which is subject to 6% capital gains tax, DST of 1.5% but exempt from 12% VAT (BIR Ruling No. DA-152-04 dated March 31, 2004). It is also apt to add that Section 3 (b) (e) of Revenue Regulations No. 7-2003 provides for guidelines in determining whether a particular real property is a capital asset or ordinary asset, viz. : "SEC. 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or Ordinary Asset. xxx xxx xxx (b) Taxpayer Not Engaged in the Real Estate Business xxx xxx xxx (e) Treatment of abandoned and idle real properties. Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and become idle, shall continue to be treated as ordinary assets. Real property initially acquired by a taxpayer engaged in the real estate business shall not result in its conversion into a capital asset even if the same subsequently abandoned or becomes idle. dctai Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2(g) hereof are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties." Applying the above-stated proviso on the instant case, there is no doubt that herein subject property, granting, for the sake of argument that it was classified as ordinary asset, was automatically converted into capital asset considering the fact that as a consequence of AG&P's Petition for Rehabilitation and Suspension of Actions and Proceedings before Branch 2, Fourth Judicial Region, Regional Trial Court, Batangas City on January 31, 2002, said Court issued a Stay Order dated February 21, 2002 prohibiting AG&P from selling, encumbering, transferring or disposing in any manner any of its properties except in ordinary course of business. Accordingly, we hereby confirm your opinion that the sale of the above mentioned property which has long remained idle and considered as capital asset, is: (1) subject to the capital gains tax of 6% pursuant to Section 27 (D) (5) of the Tax Code of 1997, as amended; (2) subject to DST at the rate of P15.00 for each P1,000.00 or fractional part thereof in excess of P1,000.00 or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 of the Tax Code of 1997, as amended; and (3) exempt from 12% VAT, the property not being primarily held and offered for sale or lease to customers in the ordinary course of AG&P's trade or business, as provided under Section 109 (w) of the Tax Code of 1997, as amended. (BIR Ruling No. DA-270-04 dated May 17, 2004). DHCSTa 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service