Ong Meneses Gonzales & Gupit Law Offices

September 15, 2009 BIR RULING [DA-(C-210) 541-09] Sec. 27 (D) (5); DA-692-2006; DA-014-2003; DA-197-07 & DA-685-06 Ong Meneses Gonzales & Gupit Law Offices Suite 1515 Cityland 10 Tower 1 6815 Ayala Avenue, Makati City Attention: Atty. Francisco B. Gonzales V Gentlemen : This refers to your letter dated July 24, 2009 requesting on behalf of your client, 1st J&P Land, Inc. ("J&P"), confirmation of your opinion that its sale of real property held and classified as a capital asset is subject to the 6% capital gains tax (CGT) and to the 1.5% documentary stamp tax (DST) imposed under Sections 27 (D) (5) and 196 of the Tax Code of 1997, as amended, respectively; and that said sale is not subject to the 12% value-added tax (VAT) imposed under Section 106 of the same Code. J&P, with office address at No. 66-N Kitanlad Street, Quezon City, is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) on June 12, 2007, with a primary purpose that allows it to be a holding company of real estate classified as investments, as follows: "To acquire by purchase, lease, donation or otherwise, and to own, use, improve, develop, subdivide, mortgage, exchange, lease, and hold for investment or otherwise, real estate of all kinds, whether to improve, manage, or otherwise dispose of buildings, houses, apartments, and other structures of whatever kind, together with their appurtenances." On June 28, 2007, J&P acquired a parcel of land with a lot area of 2,277 square meters, more or less, located at No. 3 Asias Street, San Juan, Metro Manila, which was subsequently registered in its name on July 16, 2007 under Transfer Certificate of Title No. 13009-R, issued by the registry of Deeds for San Juan, Metro Manila, for the purpose of realizing gains in the appreciation of the said property without using the property for business by the company. Consistent therewith, the said property was classified as an "investment" in J&P's 2007 and 2008 financial statements. Since the time of its incorporation up to the present, J&P has had no commercial operations and, thus, has had no income. Neither has the subject property generated any income for J&P. It does not have any license from, and is not registered with, the Housing and Land Use Regulatory Board (HLURB). Since the subject property was acquired as a capital investment, no deal or transaction whatsoever involving the same has been entered into. Neither has there been any improvement or additional investment introduced thereon. Moreover, it has never been offered for rent or actually leased to any person as, in fact, since the time of acquisition, it remains vacant, idle, and undeveloped. Meanwhile, on September 23, 2008, J&P's Board of Directors approved a resolution stating that it is in the best interest of J&P's stockholders to sell the subject property. For said purpose, the Chairman of the Board of Directors and the Treasurer were authorized to take all actions necessary to sell the subject property and to sign all the documents required to effect the sale. Pursuant thereto, J&P is presently in serious negotiations for the sale of the subject property, and is projected to consummate the sale in August 2009. In reply, please be informed that Section 27 (D) (5) of the 1997 Tax Code, as amended, provides, viz. : ATcaHS "Sec. 27. Rates of Income Tax on Domestic Corporation . Capital Gains Realized from the Sale, Exchange, or Disposition of Lands and/or Buildings. A final tax of six percent (6%) is hereby 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 the 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, Sec. 39 (A) (1) of the same Code provides: " Capital Assets . The term "capital assets" 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 be properly 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." cCSHET In BIR Ruling No. DA-692-2006 dated December 7, 2006 cited in BIR Ruling No. 197-2007 dated March 30, 2007, the Bureau ruled as follows: "It is undisputed that the yardstick for determining whether the property is capital asset or ordinary asset is the actual use of the said property. Thus, if the property is not actually used in trade or business of the taxpayer, whether or not connected with his trade or business, or not held for lease or sale to customers, it will be classified as a capital asset. Moreover, if the property is merely held for investment purposes and remains vacant and idle, it is deemed a capital asset. In stressing the rationale of the above-mentioned rule, this Office elucidated the matter in BIR Ruling No. 014-2003 dated October 28, 2003, as follows: " It is apparent under the foregoing provision that for a property to be considered an ordinary asset it must be actually used in the business of the corporation . Accordingly, on the condition that Wendell Holdings Co., Inc. is not habitually engaged in the real estate business as represented, the property under consideration is a capital asset. The property was neither held primarily for sale to customers nor actually used in the business of Wendell Holdings Co., Inc. The property is not actually used in the business of Wendell Holdings Co., Inc. as it has remained idle and undeveloped. Therefore, the sale of the property under consideration is a sale of a capital asset, not an ordinary asset. As such, the transaction is subject to capital gains tax of 6% under Section 27(D)(5) and not to the creditable withholding tax." (Italics and emphasis supplied) DAHaTc In the instant case, the aforementioned real property of J&P is properly classified as capital asset because J&P holds such property as investment. J&P never used said realty in business, hence, it never was subjected to depreciation, nor did it form part of J&P's inventory as J&P never engages in the real estate business. Accordingly, the intended sale of said real property shall be subject to the capital gains tax imposed under Section 27 (D) (5) of the 1997 Tax Code, as amended, and to the documentary stamp tax imposed under Section 196 thereof. Moreover, the sale of the above-mentioned real property of J&P, treated as capital asset, 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 No. 4-2007, implementing Republic Act No. 9337. 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