Bernaldo Directo & Po

September 14, 2009 BIR RULING [DA-(C-208) 536-09] Sec. 27 (D) (5); 39 (A); RR 7-2003; UN-276-95; 660-99; DA-397-2000; DA-219-05; DA-654-06 Bernaldo Directo & Po Unit 1807 Cityland Condominium 10-Tower 1 6815 Ayala Avenue cor. H.V. dela Costa Street Makati City Attention: Atty. Pepito G. Po Partner Gentlemen : This refers to your letter dated May 27, 2008 requesting on behalf of your client, Tambunting Realty Management Corporation ("TRMC"), confirmation of your opinion that the parcels of land owned by TRMC, which have no improvements and remain idle from the time of acquisition, are considered capital assets; and in case of subsequent sale thereof, the same shall be subject to the 6% capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997, as amended, and to the documentary stamp tax at the rate of 1.5% imposed under Section 196 of the same Code. HcSCED The facts, as represented, are as follows: TRMC is a domestic corporation duly organized and existing under the laws of the Philippines and was registered as a realty company to be the repository of Tambunting Estate properties. As such, it never engaged in actual realty operations. The heirs of the Tambunting Estate contemplated in terminating the corporate existence of TRMC. For such purpose, the Board of Directors of TRMC passed a resolution to authorize the disposal of some of its properties. By virtue of the Board Resolution, Ambassador Jesus P. Tambunting had been appointed attorney-in-fact for the disposition of the following three real properties located in Antipolo, Rizal, covered by Transfer Certificate of Title Nos. 230470, 328488 and 328482, all of the Registry of Deeds for the Province of Rizal. The said real properties remain idle, unproductive and were never developed since the time the same were acquired by TRMC. No improvements were made thereon and that such properties were never used in its realty operations so as to bring about income of whatever kind to the company. The said realties, however, were used as collateral for loans obtained by different persons. It is your view, that the above real properties owned by TRMC should be classified as capital assets and the sale thereof subject to the 6% capital gains tax, based on the following grounds, to wit: 1) TRMC never commenced any realty operations as the same was only a vehicle and repository of Tambunting Estate properties; 2) the subject properties were never used in trade or business nor intended to be used in its realty operations; 3) the subject properties, not being used in trade or business, do not derive nor is deriving any rental income; and 4) the subject properties have been idle and unproductive since the time acquired by TRMC. From the foregoing, it is your opinion that the intended sale/disposition by TRMC of its above-mentioned real properties classified as capital assets, is subject only to the 6% capital gains tax and the 1.5% documentary stamp tax imposed under Sections 27 (D) (5) and 196 of the Tax Code of 1997, as amended, respectively. 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. EcHaAC In view of the foregoing, and inasmuch as the aforementioned parcels of land of TRMC, were never used in business, as TRMC has never commenced business operations, and neither said properties were offered for lease to third party, the said idle, unproductive and undeveloped realties, accordingly, are considered as capital assets. Consequently, the sale of said parcels 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 subsequent sale of the above real properties by TRMC, treated as its capital assets, 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service