St. Francis Square Development, Corp.

June 24, 2009 BIR RULING [DA-(C-105) 323-09] 27 (D) (5); 39 (A) (1); DA(C-022)104-2008; DA(C-052)185-09 St. Francis Square Development, Corp. 4th Floor, St. Francis Square, Doa Julia Vargas Avenue cor. Bank Drive Ortigas Center, Mandaluyong City Attention: Rolando P. Domingo Senior Vice President Gentlemen : This refers to your letter dated December 2, 2008 requesting for confirmation of your opinion as follows: cACTaI 1. The three (3) parcels of land covered by Transfer Certificates of Title (TCT) No. 6057-R, 6058-R and 6059-R (the "Properties") which were recorded as investment in the books of St. Francis Square Development, Corp. (formerly, ASB Development Corporation which is formerly Tiffany Tower Realty Corporation) from the time of acquisition in 1994 up to the present and remain abandoned and idle for fourteen (14) years are classified as capital asset; and 2. The sale of the Properties is not in the ordinary course of business but pursuant to the rehabilitation plan of ASB Group of Companies and therefore, subject to 6% capital gains tax and not subject to value added tax. EacHCD It is represented that St. Francis Square Development Corporation ("SFSDC") is a corporation duly organized and existing under the laws of the Philippines with principal place of business at 4th Floor, St. Francis Square, Julia Vargas Avenue corner Bank Drive, Ortigas Center, Mandaluyong City. SFSDC, as one of the corporations belonging to the ASB Group of Companies, is under receivership and rehabilitation pursuant to the Securities and Exchange Commission (SEC) Order dated April 26, 2001. TcSCEa As part of its rehabilitation plan, it is enjoined to dispose its properties covered by TCT Nos. 6057-R, 6058-R and 6059-R located at Hoover St., San Juan, Metro Manila. These properties remain abandoned and idle for the past fourteen (14) years and have been recorded in SFSDC's books as Investment in Real Estate from the time of purchase in 1994 up to the present. SFSDC has not introduced any improvement thereon from the time it purchased these vacant lots. In reply, please be informed that Section 39 (A) (1) of the 1997 Tax Code, as amended, defines capital asset, to wit: DETcAH "Sec. 39. Capital Gains and Losses. (A) Definitions. As used in this Title (1) Capital Assets. The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include 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 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 Section 34; or real property used in trade or business of the taxpayer." CTacSE As stated above, capital assets do not include 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 real property used in trade or business of the taxpayer. Considering that since the time of acquisition, fourteen (14) years ago, the Properties have never been developed or used by SFSDC in the ordinary course of its business and has remained vacant, abandoned and idle, then the subject Properties are rightfully classified as capital assets. On the other hand, Section 27 (D) (5) of the Tax Code of 1997, as amended, provides, viz. : EIDaAH "SEC. 27. Rates of Income Tax on Domestic Corporations. (D) Rates of Tax on Certain Passive Incomes. xxx xxx xxx (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." Furthermore, 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." 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. Finally, in BIR Ruling No. DA-420-05 dated October 10, 2005 (citing BIR Ruling DA-155-2005 dated April 14, 2005 and BIR Ruling DA 219-2005 dated May 5, 2005 among others), the BIR ruled that the subject realties of Union Ajinomoto Realty Corporation which have remained vacant, idle, unproductive and unimproved since the time of acquisition do not fall under any of the assets enumerated under Section 39 (A) (1) of the Tax Code of 1997 and Section 2 (b) of Revenue Regulations No. 7-2003 and are properly classified as capital assets; that the sale of the aforesaid properties which are classified as capital assets, is subject to capital gains tax at the rate of 6% on the gain presumed to have been realized from the sale or transfer; and that the sale of the said vacant and/or idle real properties, not being used in the ordinary course of the trade or business of UARC is not subject to the 10% 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 SFSDC, the sale the said Properties pursuant to a rehabilitation plan, 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. Such being the case, this Office hereby confirms your opinion that: 1. The Properties currently recorded as an investment in the books of SFSDC are classified as capital assets; and 2. The sale of the Properties is not held in the ordinary course of business but pursuant to the rehabilitation plan of ASB Group of Companies and therefore, subject to 6% capital gains tax and not subject to value added tax. 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