Lee Tay and Lee Chay, Inc.

June 10, 2009 BIR RULING [DA-(C-087) 288-09] Sec. 27 (D) (5); DA-692-2006; DA-201-2006 Lee Tay and Lee Chay, Inc. 2071 Int., Juan Luna St. Tondo, Manila Attention: Lee Chi Chiao President Gentlemen : This refers to your letter dated June 1, 2009 requesting for a ruling that the sale of a real property owned by Lee Tay and Lee Chay, Inc. ("LTLC") is not subject to value-added tax but to capital gains tax and documentary stamp tax. It is represented that LTLC is a domestic corporation registered with the Securities and Exchange Commission with principal office at 2071 Juan Luna St., Tondo, Manila. Its primary purpose is to engage in the lumber business. LTLC is the registered owner of a parcel of land in Rayabago St., Tondo, Manila with a total area of 973.26 square meters covered by Transfer Certificate of Title No. 286070 (the "property"). The property used to be the site of a building which was leased by LTLC to Alaska Lumber Co. for the period 1995 to 2005. In 2005, the building was accidentally gutted down by fire. Thereafter, the building was completely demolished and the property has since become vacant and abandoned as capital asset by LTLC. On April 15, 2009, LTLC sold the property to Spouses Wendel Pe and Kathleen Lee Lopez. Based on the foregoing representations, you now request for confirmation of your opinion that above-mentioned property which has been abandoned for more than four years is a capital asset and the sale thereof not being made in the regular course of trade or business of LTLC, is not subject to value-added tax under Sec. 106 (A) (1) (a) of the 1997 National Internal Revenue Code (NIRC), as amended, but to capital gains tax (CGT) as set forth under Sec. 27 (D) (5) of the NIRC and to the documentary stamp tax (DST) under Section 196 of the NIRC. In reply, please be informed that Sec. 27 (D) (5) of the 1997 NIRC, as amended, provides that a final tax of six percent (6%) is imposed on the gains 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 Sec. 6 (E) of the said Code, whichever is higher, of such lands and/or buildings. The term "capital asset" is negatively defined in Section 39 (A) (1) of the Tax Code, as ". . . property held by the taxpayer (whether or not connected with his trade of business), but does not include stock in trade of the taxpayer or other property of 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 Sec. 34; or real property used in trade or business of the taxpayer". IASTDE Thus, where the property has become idle and vacant, does not form part of the inventory of the taxpayer for sale or lease to customers, and not actually used in business, this Office has consistently ruled that the same shall be considered as capital asset and the gain presumed to have been realized from its sale will be subject to the CGT when sold. (BIR Rulings DA-163-05 dated April 14, 2005, DA-040-03, DA-008-04 dated January 6, 2004, DA-152-04, DA-270-04 dated May 17, 2004, DA-155-05 dated April 14, 2005, DA-219-05 dated May 5, 2005) It is noted, however, that under Revenue Regulations (RR) No. 07-03, all real properties acquired by a taxpayer that is habitually engaged in the real estate business shall be considered ordinary assets. Sec. 2, pars. (d), (e) and (f) of RR No. 7-2003, defines the persons engaged in the real estate business, as follows: CEASaT "d. Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate. "e. Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale or lease. "f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent." Based on the above definitions, LTLC, whose primary purpose is to engage in the lumber business, is a not considered a company habitually engaged in the real estate business. In BIR Ruling DA-201-06 dated April 3, 2006, citing BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003, the BIR held that where the seller is not engaged in the real estate business, a property not forming part of its inventory is considered a capital asset, thus: IEcaHS ". . . Considering that RS is not real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to carry on its agricultural business, the parcels of land to be sold by RS are not stock in trade or other real property of a kind which would properly be included in RS' inventory if on hand at the close of the taxable year. Nor are they real property held primarily for sale or lease to customers in the ordinary course of trade or business." Moreover, while it is true that the property used to be the site of a building formerly leased by LTLC, the rule under Section 3 par. (e) of RR 7-03 provides that a property formerly used in business by a taxpayer not engaged in the real estate business is automatically converted into capital asset for as long as the property has been abandoned for more than two years prior to the sale. Said section reads: "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 became 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 is subsequently abandoned or becomes idle. 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." CIETDc Applying the above discussions, since LTLC is not engaged in real estate business, and considering further that the property which was formerly used in business has become vacant for almost four years prior to its disposition in April 2009, the, property is deemed converted into a capital asset of LTLC. WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that the above-mentioned property, which does not fall under any of the assets enumerated in Section 39 (A) (1) of the Tax Code of 1997 in relation to Section 3 (e) of Revenue Regulations No. 7-2003, is considered as capital asset and the sale thereof, not being made in the regular course of trade or business, is subject to: 1. Capital gains tax of 6% pursuant to Section 27 (D) (5) of the NIRC of 1997, 2. Documentary stamp tax at the rate of P15.00 for each P1,000 or fractional part thereof in excess of P1,000, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196, supra; 3. However, the sale is not subject to the 12% VAT pursuant to Section 4.09-1 (p) of Revenue Regulations No. 16-2005 inasmuch as said property is not held primarily for sale or lease to customers nor used in the ordinary course of your primary trade or business. 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. cADSCT Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service