Sta. Elena Properties, Inc.

November 11, 2008 BIR RULING [DA-(C-130) 413-08] 27 (D) (5); 39 (A) (1); RR 7-2003; DA-152-04 Sta. Elena Properties, Inc. 21/F The Enterprise Center, Tower 2 6766 Ayala Avenue corner Paseo de Roxas Makati City Attention: Jowel T. Cloma Legal Counsel Gentlemen : This refers to your letter dated November 4, 2008 requesting confirmation of your opinion that: 1. The vacant and/or idle properties covered by TCT Nos. T-255670, T-566248, T-628473, T-628476 and T-628479 which were never used by SEPI in its trade or business, nor subjected to depreciation, nor included in its stock in trade or inventory, nor held primarily for sale or lease to customers in the ordinary course of its trade or business, and never rented out to any one since their acquisition, are classified as capital assets in the hands of SEPI; 2. The sale of the said vacant and/or idle real property covered by TCT Nos. T-255670, T-566248, T-628473, T-628476 and T-628479 classified as capital assets in the hands of SEPI are subject to the 6% capital gains and 1.5% documentary stamp taxes pursuant to Sections 27 (D) (5) and 196 (b) of the Tax Code of 1997; and 3. The sale of the vacant and/or idle real properties, not being used in the ordinary course of the trade or business of SEPI is not subject to the 12% value-added tax. It is represented that STA. ELENA PROPERTIES, INC. ("SEPI", for brevity) is a domestic corporation duly registered with the Securities and Exchange Commission primarily engaged in the development and sale of residential lots and sale of shares of stock of Sta. Elena Golf Club, Inc.; that SEPI is the registered owner of five (5) parcels of land situated in Cabuyao and Sta. Rosa, Laguna, which are embraced under Transfer Certificates of Title (TCT) Nos. T-255670, T-566248, T-628473, T-628476 and T-628479 issued by the Registry of Deeds for Calamba City; that these five (5) parcels of land have never been developed or used by SEPI in the ordinary course of its trade or business; that from the time of their acquisition in the name of SEPI, these properties have remained vacant and idle and were not held and owned primarily by SEPI for sale to customers in the ordinary course of its trade or business; that these assets had been classified as "investments" in the books of the corporation; that they were not subjected to depreciation, nor included in the inventory of property for lease, and never been offered for rent or actually leased to anybody since their acquisition and as such they have always been treated by SEPI as capitals assets; that SEPI did not derive any income at all from the said property; that these are the full proofs that the subject realties were never and are not used in the ordinary course of trade or business of the company; and that since the subject properties produce no income at all to the company and due to lack of interest of the corporation in maintaining the said properties, the Board of Directors of SEPI have decided to sell the subject properties to any interested buyer. cSTDIC In reply, please be informed that whenever a taxpayer sells real properties forming part of its inventory for sale or for lease to customers, it is considered as a sale of ordinary assets subject to the 32% income tax pursuant to Section 27 (A) of the 1997 Tax Code. However, when the real estate involved has never formed part of its inventory for sale/lease or being offered for sale/lease, or has not been otherwise used in its trade or business as evidenced by the fact that it has remained idle, raw and undeveloped, such real properties are properly classified as capital assets subject to a final tax of 6% on the gain presumed to have been realized from the sale or transfer thereof pursuant Section 27 (D) (5) of the 1997 Tax Code. The character of the real property involved in the transaction must primarily be determined, i.e., whether or not it is capital or ordinary asset, prior to the application of the appropriate tax rates. Under Section 39 (A) (1) of the 1997 Tax Code, the term "capital asset" is negatively defined as property held by the taxpayer (whether or not connected with his trade or business), but does not include (i) 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 (ii) property held by the taxpayer primarily for sale or lease to customers in the ordinary course of trade or business; or (iii) property used in trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or (iv) real property used in trade or business of the taxpayer. (BIR Ruling No. 27-02 dated July 3, 2002) Thus, if the real property is a land or building which is not actually used in business of the seller and is treated as a capital asset, as that term is defined in Section 39 (A) of the 1997 Tax Code, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the Tax Code of 1997, whichever is higher, of such land and/or building. This rule applies whether or not the seller is engaged in real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, shall apply. Corollary thereto, on December 27, 2002, the BIR issued Revenue Regulations No. 7-2003, "Providing the Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39 (A) (1) of the National Internal Revenue Code of 1997 for Purposes of Imposing the Capital Gains Tax under Section 24 (D) (1), 25 (A) (3), 25 (B) and 27 (D) (5), or the Ordinary Income Tax under Section 24 (A), 25 (A) and (B), 27 (A), 28 (A) (1) and 28 (B) (1), or the Minimum Corporate Income Tax (MCIT) under Sections 27 (E) and 28 (A) (2) of the same Code." Section 2 of Revenue Regulations No. 7-2003 provides as follows: "SEC. 2. Definition of Terms. For purposes of these regulations, the following terms shall be defined as follows: a. Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets under Sec. 39(A)(1) of the Code. b. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets under Sec. 39(A)(1) of the Code, namely: 1. Stock in trade of a taxpayer or other real 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 2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or 3. Real property used in trade or business ( i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or aSEHDA 4. Real property used in trade or business of the taxpayer." Section 3 of the same Regulations further provides, to wit: "SEC. 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or Ordinary Asset. a. Taxpayers engaged in the real estate business. Real property shall be classified with respect to taxpayers engaged in the real estate business as follows: 1. Real Estate Dealer. All real properties acquired by the real estate dealer shall be considered as ordinary assets. 2. Real Estate Developer. All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition, and all real properties which are held by the real estate developer for sale or for lease to customers in the ordinary course of his trade or business or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets. 3. Real Estate Lessor. All real properties of the real estate lessor, whether land and/or improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or business shall likewise be considered as ordinary assets. 4. Taxpayers habitually engaged in the real estate business. All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real estate shall be considered as ordinary assets. Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate. If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be deemed to be engaged in the real estate business through the establishment of substantial relevant evidence (such as consummation during the preceding year of at least six (6) taxable real estate sale transactions, regardless of the amount; registration as habitually engaged in real estate business with the Local Government Unit or the Bureau of Internal Revenue, etc.). Likewise, Section 3.d of the Regulations also provides that 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. Such being the case, inasmuch as SEPI is a company engaged in the real estate business, all real properties owned and acquired by SEPI are considered as ordinary assets. Accordingly, the sale of the said properties classified as ordinary assets is exempt from the capital gains tax imposed under Section 27 (D) (5) of the 1997 Tax Code, as amended, but subject to the expanded withholding tax under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, and to the documentary stamp tax imposed under Section 196 of the same Code, based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the 1997 Tax Code, whichever is higher. cACHSE Moreover, since the real properties are treated as ordinary assets of SEPI, the sale thereof shall be subject to the 12% value-added tax imposed under Section 108 (A) of the Tax Code of 1997, as amended. 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