Cranmore Corporation

October 13, 2008 BIR RULING [DA-(C-090) 287-08] 27 (D) (5); 39 (A) (1); DA-620-2006 Cranmore Corporation 9-B Bel-Air Condominium, 5022 P. Burgos St. Poblacion, Makati City Attention: Gumersindo L. Leuterio President Gentlemen : This refers to your letter dated September 23, 2008 requesting for confirmation of your opinion that the sale of a parcel of land owned in common by CRANMORE CORPORATION ("CRANMORE", for brevity) and EMETERIO M. DIKITANAN married to CONCEPCION Q. DIKITANAN ("Sps. Dikitanan", for brevity) and not used in business should be classified as a 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. ACaEcH The facts, as represented, are as follows: CRANMORE is a domestic corporation duly registered with the Securities and Exchange Commission to engage in the business of trading goods such as all kinds of goods, commodities, wares, and merchandise of any kind and description on wholesale and retail basis. Sps. Dikitanan are primarily engaged in pawnshops and brokerage business and neither real estate dealers nor real estate developers and have never engaged in the real estate business. CRANMORE and Sps. Dikitanan (collectively referred as the "Sellers") are the registered owners of an undivided parcel of land located at P. Burgos St., Makati City covered by Transfer Certificate of Title (TCT) No. 221415 issued by the Registry of Deeds for Makati City containing an area of Three Hundred (300) square meters, more or less. The said property has never been used by the Sellers in their trade or business, nor subjected to depreciation, nor held primarily for sale or lease to customers in the ordinary course of business, and never been offered for rent or actually leased to anybody since its acquisition. It did not derive any income at all from the said property and that it is your position that the eventual sale of the said realty shall only be subject to 6% capital gains tax and 1.5% documentary stamp tax under Sections 27 (D) (5) and 196 of the Internal Revenue Code of 1997, respectively. In reply thereto, 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, of such lands and/or buildings." Section 24 (D) (1) of the same Code, in turn, provides "(D) Capital Gains from Sale of Real Property . (1) In General. The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6 (E) of this Code, whichever is higher, is hereby imposed upon capital gains tax presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets . . . ." IcAaEH 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." 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 ["RR"] No. 7-2003) Considering that the Sellers are not real estate dealers, real estate developers, and/or real estate lessors but are engage in the trading business, the parcel of land to be sold is not stock in trade or other real property of a kind which would properly be included in the Sellers' 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. (BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003) . TAaEIc In view of the foregoing, it is the considered opinion of this Office that the income to be derived by the Sellers from the sale of the above-mentioned parcel of land is not subject to the creditable/expanded withholding tax under Section 2.57.2 (J) of RR 2-98, as last amended by RR 30-2003, but to the capital gains tax of six percent (6%) based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the Tax Code of 1997, as amended by Republic Act ("R.A.") No. 9337, whichever is higher, of such parcels of land pursuant to Sections 24 (D) (1) and 27 (D) (5) both of the same Code. Moreover, under Section 109 (P) of the Tax Code, as amended by R.A. 9337, the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business shall be exempt from VAT. Considering that the Sellers are primarily engaged in the trading business, the above-mentioned parcel of land is not being held by the Sellers primarily for sale to customers or held for lease in the ordinary course of trade or business. The sale, therefore, of the aforementioned parcel of land shall be exempt from VAT. (BIR Ruling Nos. DA-130-A-2003 dated April 25, 2003 and VAT Ruling No. 034-2001 dated June 13, 2001) . Finally, the deed of sale conveying the above-mentioned parcel of land shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of the same Code, whichever is higher. This will serves as an authority for the Revenue District Officer concerned to issue the necessary Certificate Authorizing Registration (CAR) involving the transfer of Transfer Certificate of Title No. 221415 in favor of the buyer. 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. EIcTAD Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service