Recom Realty Corporation

July 6, 2009 BIR RULING [DA-(C-116) 350-09] Secs. 27 (D) (5); 39 (A); RR 7-2003; UN-276-95; 660-99; DA-397-2000; DA-219-05; DA-654-06 Recom Realty Corporation 121 8th Street, 8th Ave., East Grace Park Caloocan City Attention: Mr. Samuel Robert U. Chuason, Jr. President Gentlemen : This refers to your letter dated July 21, 2008 requesting confirmation of the tax consequence of the sale by RECOM REALTY CORPORATION ("RRC" for brevity) of its vacant lot located at Basilan Loop, Marina East, Don Galo Street, Paraaque City. It is represented that RRC is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) in 1977. RRC's primary purpose as stated in its Articles of Incorporation is "to buy, sell, deal in, lease, mortgage, hold, manage, administer, improve, subdivide and otherwise deal in lands, houses and buildings, or any interest therein, including the introduction of improvements thereon and to deal in any kind of properties whether real or personal, whether for its own account or in a representative capacity". Although RRC by its stated purposes in its Articles of Incorporation is seemingly involved in selling real estates, it has never venture in the said business undertaking. As such, its source of income is derived from leasing activities. Sometime in 1982, RRC acquired the above parcel of land with an area of 647 square meters, without any improvements thereon. The said property is covered by TCT No. 61260 of the Registry of Deeds of Pasay City. It was acquired with the intention of developing it, however, since RRC has not venture in selling real estate said property is left idle and undeveloped since the time it was acquired. With the cost of maintaining the above parcel of land, ( i.e. , payment of a considerable amount of real estate taxes on a yearly basis) the stockholders of RRC decided to dispose the same, converting the same to cash asset to enable the corporation to expand its leasing business. HCacTI It is your view that the above property of RRC should be classified as capital asset and the sale thereof subject to the 6% capital gains tax, based on the following grounds, to wit: 1) RRC has held the above property primarily as investment (pls. see entry in the financial statements); and 2) the property had been idle and unproductive since the time acquired by RRC. From the foregoing, it is your view that the sale by RRC of its vacant lot, classified as capital asset, is subject to the 6% capital gains tax and the 1.5% documentary stamp tax only. As such, said sale is not subject to the value-added tax imposed under Section 106 of the Tax Code of 1997, as amended. In reply, please be informed that the term "capital assets" as negatively defined in Section 39 (A) (1) of the Tax Code of 1997, 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 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 allowances for depreciation provided in Subsection (F) of Section 34, or real property used in trade or business of the taxpayer. In view of the foregoing, and inasmuch as the aforementioned parcel of land of RRC was never used in business and neither was it offered for lease to third party, the said idle and undeveloped realty, accordingly, is considered as capital asset. Consequently, the sale of said parcel of land is subject to the 6% capital gains tax under Section 27 (D) (5) of the Tax Code of 1997, as amended. Likewise, the said sale is subject to the documentary stamp tax imposed under Section 196 of the same Tax Code. (BIR Ruling No. 660-99 dated November 29, 1999; BIR Ruling No. DA-397-2000 dated November 20, 2000 citing UN-276-95 dated July 26, 1995; Rev. Regs. No. 7-2003) Moreover, the sale of the above property by RRC, treated as its capital asset, is not subject to the 12% value-added tax imposed under Section 106 of the 1997 Tax Code, as amended, in accordance with Sec. 4.109-1 (B) (p) of Revenue Regulations (RR) No. 16-2005, as amended by RR 4-2007, implementing Republic Act No. 9337. (BIR Ruling No. DA-219-2005 dated May 5, 2005 cited in BIR Ruling Nos. DA-653 & 654-2006, both dated November 7, 2006) 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. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service