Fortune Tobacco Corporation

October 19, 2009 BIR RULING [DA-(C-237) 610-09] Sec. 27 (D) (5); RR 7-2003; DA (C-159) 493-2008 dtd 12/04/08 Fortune Tobacco Corporation Brgy. Fortune, Marikina City Attention: Mr. Rojas Chua SVP-Finance Gentlemen : This refers to your undated letter, requesting a confirmation of your opinion that the parcel of land covered by TCT No. 664535 and the improvement thereon registered in the name of Fortune Tobacco Corporation does not fall under any of the assets enumerated in Section 39 (A) (1) of the Tax Code of 1997 and Section 2 (B) of Revenue Regulations No. 7-2003 and thus therefore, properly classified as capital asset. It is represented that Fortune Tobacco Corporation (FTC) is a corporation organized and existing under the laws of the Republic of the Philippines; that it is primarily engaged in the manufacture of cigarettes; that its principal place of business is located at Fortune Avenue, Barangay Fortune, Marikina City; that on January 17, 2002, FTC acquired a parcel of land particularly described as follows: 1. Land Area 315 sq. m. 2. TCT No. 664535 3. Improvement Old House 4. Location Bo. of Mayamot, Cainta, Rizal that since its acquisition, said land and the old house have been idle and was/is never used or intended for any purpose other than as investment in real property; that it is recorded in FTC books of accounts and classified in the audited financial statements under the asset account Land; CIScaA 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 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, 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 FTC is a manufacturing company and not a realtor, the subject property classified under its books as investment property is rightfully treated as capital asset. It is a residential old house and lot which remained idle and was never been used or intended for any purpose other than as investment in real property. The property remained unproductive for business purposes as there was no income derived from such. Inasmuch as it is an investment property under its books, the same 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. (BIR Ruling No. DA-152-2004 dated March 31, 2004 cited in BIR Ruling No. DA-270-04 dated March 17, 2004) The sale by FTC of the said properties are subject to the 6% capital gains tax imposed under Section 24 (D) 5 of the Tax Code of 1997, as amended. Moreover, the sale of the above property of FTC 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 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