LORA Enterprises, Inc.

December 15, 2008 BIR RULING [DA-(C-171) 530-08] 27 (D) (5); 39 (A) (1); RR 7-2003; DA-301-2004; DA-620-2006 LORA Enterprises, Inc. Carmela Valley Executive Building No. 9 Lacson St., Bacolod City Attention: Mr. Hernan R. Lopez President Gentlemen : This refers to your letter dated November 10, 2008 requesting for a ruling on the applicability of the provisions of Section 27 (D) (5) of the Tax Code of 1997, as amended, on the sale of your company's real property. The facts as represented are as follows: LORA ENTERPRISES, INC. ("LORA", for brevity) is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines. It is primarily engaged in operation of rice and sugar mill. LORA is the registered owner of a real property located in Dasmarias Village, Makati City covered by Transfer Certificate of Title (TCT) No. 399216 ("Property") issued by the Registry of Deeds for Makati City as part of its investment supposedly intended for speculation as to the later appreciation of real estate values. The said asset has been classified as "Investment" in the corporation's books and has never been used by LORA in its 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. Thus, LORA did not derive any income at all from the said property. The Board of Directors of LORA now intend to dispose the said realty of the corporation due to lack of interest of the stockholders in maintaining the same for the reason that it spending a huge amount of money paying real estate tax rather than benefiting from said property. In connection therewith, it is your position that the above property should be classified as a capital asset and the sale thereof is subject to the 6% capital gains tax. DHcSIT In support of your request, you submitted the following documents: 1. Corresponding Transfer Certificate of Title; 2. Corresponding Tax Declaration; 3. LORA's Articles of Incorporation; 4. Comparative Audited Financial Statement for the years 2006 and 2007; and 5. Certification from the Barangay Dasmarias Council certifying, among others, that the subject realty has never been leased whatsoever but only used as a residence of its officer. In reply, please be informed that the term "capital asset" as negatively defined in Section 39 (A) (1) of the 1997 Tax Code, as amended, 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. Furthermore, Section 3 (4) of Revenue Regulations ("RR") No. 7-2003 provides that 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. As defined under Section 2 (g) of RR 7-2003, taxpayers engaged in the real estate business shall refer collectively to 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 the regulations. Considering that LORA is not a real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is the operation of rice and sugar mill, the Property to be sold by LORA is not stock in trade or other real property of a kind which would properly be included in LORA's 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). Furthermore, in BIR Ruling No. 014-03, dated October 28, 2003, it was ruled that for a property to be considered an ordinary asset, it must be actually used in the business of the corporation. The BIR stated that on the condition that the taxpayer concerned was not habitually engaged in the real estate business, the property not actually used in the business of the taxpayer, was considered a capital asset. In view of the foregoing, it is the considered opinion of this Office that the income to be derived by LORA from the sale of the above-mentioned Property 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 Section 27 (D) (5) of the same Code. Moreover, under Section 109 (p) of the Tax Code of 1997, as amended by R.A. 9337 and as implemented by RR 4-2007, 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. IaAEHD Considering that LORA is primarily engaged in the operation of rice and sugar mill, the above-mentioned Property is not being held by LORA primarily for sale to customers or held for lease in the ordinary course of trade or business. The sale by LORA of the Property shall be exempt from VAT. (BIR Ruling Nos. DA-130-A-2003 dated April 25, 2003, DA-620-2006 dated October 18, 2006 and VAT Ruling No. 034-2001 dated June 13, 2001). Finally, the deed of sale conveying the above-mentioned parcels 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 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service