Shemberg Marketing Corporation

August 20, 2009 BIR RULING [DA-(C-185) 471-09] Sec. 27 (D) (5); 109 (P); 196; BIR Ruling 014-03; DA 301-04; 163-05; DA-692-2006; DA-201-2006 Shemberg Marketing Corporation J.P. Rizal St., Basak Mandaue City 6014 Attention: Ernesto U. Dacay Vice-President Gentlemen : This refers to your letter dated August 10, 2009 requesting for a ruling that the sale of a real property owned by Shemberg Marketing Corporation ("SMC") is subject to capital gains tax and documentary stamp tax and but is exempt from value added tax. It is represented that SMC is a domestic corporation registered with the Securities and Exchange Commission with principal office at J.P. Rizal Street, Basak, Mandaue City; that its primary purpose is "to carry on the business of import and export of general merchandise in wholesale in all foreign and domestic markets" as stated in its Articles of Incorporation; that it is the registered owner of a parcel of land with an area of 12,963 square meters known as Lot No. 2206-plan II-5121 Amd. 2, located in Labogan, Mandaue City and covered by Transfer Certificate of Title No. 23522 (the "property"); and that on July 16, 2009, SMC sold the property to CEED Properties, Inc. It is your position that the property which has been classified by SMC as residential lot per its Tax Declaration No. 02551 and was never included in its inventories for sale nor used in business since its acquisition nor subject to depreciation, and merely held by SMC for investment purposes only is a capital asset and that the sale thereof, not being made in the regular course of trade or business of SMC, is subject to capital gains tax (CGT) as set forth under Sec. 27 (D) (5) of the National Internal Revenue Code (1997 Tax Code), as amended, and to documentary stamp tax (DST) under Section 196 of the Tax Code but is exempt from value-added tax VAT under Sec. 106 (A) (1) (a) of the same Tax Code. IEaHSD In reply, please be informed that Sec. 27 (D) (5) of the 1997 Tax Code, as amended, provides that a final tax of six percent (6%) is imposed on the gains 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 Sec. 6 (E) of the said Code, whichever is higher, of such lands and/or buildings. The term "capital asset" is negatively defined in Section 39 (A) (1) of the Tax Code, as ". . . property held by the taxpayer (whether or not connected with his trade of business), but does not include stock in trade of the taxpayer or other property of 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 Sec. 34; or real property used in trade or business of the taxpayer". Thus, where the property has become idle and vacant, does not form part of the inventory of the taxpayer for sale or lease to customers, and not actually used in business, this Office has consistently ruled that the same shall be considered as capital asset and the gain presumed to have been realized from its sale will be subject to the CGT when sold. (BIR Rulings DA-163-05 dated April 14, 2005, DA-040-03, DA-008-04 dated January 6, 2004, DA-152-04, DA-270-04 dated May 17, 2004, DA-155-05 dated April 14, 2005, DA-219-05 dated May 5, 2005) It is noted, however, that under Revenue Regulations (RR) No. 07-03, all real properties acquired by a taxpayer that is habitually engaged in the real estate business shall be considered ordinary assets. Sec. 2, pars. (d), (e) and (f) of RR No. 7-2003, defines the persons engaged in the real estate business, as follows: "d. Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate. aCSHDI "e. Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale or lease. "f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent." Based on the above definitions, SMC, whose primary purpose is to engage in the import and export of general merchandise, is not considered as a company habitually engaged in the real estate business. In BIR Ruling DA-201-06 dated April 3, 2006, citing BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003, the BIR held that where the seller is not engaged in the real estate business, a property not forming part of its inventory is considered a capital asset, thus: ". . . Considering that RS is not real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to carry on its agricultural business, the parcels of land to be sold by RS are not stock in trade or other real property of a kind which would properly be included in RS' 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." DTaAHS Applying the above discussions, inasmuch as SMC is not engaged in real estate business, and since the property under consideration is a capital asset, this Office is of the opinion as it hereby holds that the sale of the property is a sale of a capital asset, and not an ordinary asset. WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that the above-mentioned property, which does not fall under any of the assets enumerated in Section 39 (A) (1) of the 1997 Tax Code, in relation to Section 3 (e) of RR 7-2003, is considered as capital asset and the sale thereof, not being made in the regular course of trade or business, is subject to: 1. Capital gains tax of 6% pursuant to Section 27 (D) (5) of the 1997 Tax Code; 2. Documentary stamp tax at the rate of P15.00 for each P1,000 or fractional part thereof in excess of P1,000, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196, supra ; 3. However, the sale is not subject to the 12% VAT pursuant to Section 4.109-1 (p) of RR 16-2005 inasmuch as said property is not held primarily for sale or lease to customers nor used in the ordinary course of your primary trade or business. AEIDTc 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