Yap Capili Castillo Del Carmen & Associates

September 8, 2009 BIR RULING [DA-(C-197) 505-09] 27 (D) (5); DA-270-04; DA-(C-020) 100-08 Yap Capili Castillo Del Carmen & Associates Attorneys & Counsellors-at-Law 38 De Vera St., Near Cor. Roosevelt, Quezon City Attention: Atty. Jose W. Yap Gentlemen : This refers to your letter dated August 11, 2009 requesting, on behalf of your client, Ericson Realty & Development Corporation , confirmation of your opinion that sale of the real property under TCT No. N-243535 is exempt from 12% Value Added Tax (VAT). CcADHI It is represented that Ericson Realty & Development Corporation ("ERICSON" for brevity) with TIN 220-558-320-000, is a domestic corporation with principal office at 330 Robinsons Road, Oranbo, Pasig City; that it was registered with the Securities and Exchange Commission (SEC) under SEC Registration No. CS200257576 dated October 10, 2002; that according to ERICSON's Articles of Incorporation, its primary purpose is "to own, use, improve, develop, subdivide, sell, exchange, lease, and hold for investment or otherwise, real estate of all kinds, including buildings, houses, apartments and other structures"; that ERICSON owns a parcel of land situated at Green Meadow, Quezon City with an area of 874.50 square meters covered by TCT No. N-243535 and Tax Declaration No. 04858 and which property was purchased on October 22, 2002; the subject property was neither held for sale or lease for clients nor intended for use in the ordinary course of trade or business; that from the time of incorporation, ERICSON never commenced business activities but had been filing its monthly, quarterly and annual business tax returns showing no operations; that in as much as there is neither operation nor income that may be derived for maintaining the corporation and payment of annual real property tax, it intends to dissolve its corporate life; and that ERICSON now intends to sell the aforementioned real property. In reply, please be informed that under Section 27 (D) (5) of the Tax Code of 1997, as amended, a final tax of six percent (6%) is 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 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. On the other hand, under Sec. 39 (A) (1) of the 1997 Tax Code, as amended, the term "capital assets" 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 to customers in the ordinary course of his trade or business; or (iii) 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 (iv) real property used in trade or business of the taxpayer. Considering that ERICSON never commenced commercial operations since its incorporation and in fact, is now contemplating to cease its corporate existence, the subject real property registered under ERICSON's name, is properly treated as capital asset. The said real property classified as "investment property" which is idle, unproductive and unimproved since the time of acquisition, and does not fall under any of the assets enumerated under Section 39 (A) (1) of the Tax Code of 1997, as amended, and of Revenue Regulations No. 7-2003, are classified as capital assets (BIR Ruling DA-152-2004 dated March 31, 2004 cited in BIR Ruling No. DA-270-04 dated March 17, 2004). The sale by the ERICSON of said property in furtherance of ERICSON's liquidation, therefore, is subject to the 6% capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997, as amended. HTSaEC Moreover, the sale of the above property of ERICSON treated as capital asset is not subject to the 12% value-added tax imposed under Section 106 of the Tax Code of 1997, as amended. However, it is subject to the 1.5% documentary stamp tax imposed under Section 196 of the same Code. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service