Diaz Murillo Dalupan and Company

October 30, 2009 BIR RULING [DA-(C-248) 637-09] Secs. 27 (D) (5) & 39 (A) (1); BIR Ruling DA-011-08 Diaz Murillo Dalupan and Company Certified Public Accountants 5th Floor, Don Jacinto Building Dela Rosa corner Salcedo Sts. Legaspi Village, Makati City Attention: Atty. Bethuel V. Tanupan Partner Gentlemen : This refers to your letter dated July 29, 2009, requesting in behalf of your client, Mulawin Investments, Inc. ( "The Company", for brevity), a confirmation of your opinion that real properties classified as investments in the audited financial statements, not actually used in trade or business, and remain as vacant and idle are deemed capital assets, hence, subject to 6% capital gains tax and documentary stamp tax in case of sale or disposition. cSCTEH The factual background of the case are as follows: The Company was incorporated and registered with the Philippine Securities and Exchange Commission (SEC) on July 19, 1973 primarily to engage in investment activities, to hold property, real and personal, to acquire, purchase, hold, sell and transfer shares of stock, bonds debentures, notes evidence of indebtedness, and other securities, contracts or obligation of any other corporation or association. The Company has its principal office located at No. 6 Villamar Second Street, Tambo, Paraaque City. The Board of Directors, in its meeting on December 6, 2004, reached a decision to temporary cease the Company's operations effective December 31, 2004 due to increasing operational costs, pending for deliberation on the future direction of the Company. The affidavit of non-operational had been filed already with the SEC and various governmental agencies. As of December 31, 2008, the Company has outstanding investment in real estate amounting to P1,876,275.00. The Company is contemplating to sell its real estate taking into consideration that fact that these properties remain as vacant and idle for a long period of time and the Company has already filed an Affidavit of Non-Operation as a prelude to filing a Petition for Dissolution before the SEC. In reply thereto, please be informed that Section 27 (D) (5) of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 7-2003, provides "(5) 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." 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. This is fortified in BIR Ruling No. 014-2003 dated October 28, 2003, where this Office ruled that: "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." aICcHA The phrase "taxpayers engaged in the real estate business" refers collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayers not engaged in the real estate business" shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of these Regulations. [Sec. 2 (g), Revenue Regulations No. 7-2003] Inasmuch as The Company is not primarily engaged in real estate business, but is merely a holding company organized to acquire, purchase, own or hold for investment or otherwise shares of stock, bonds and other securities of any corporation or entity, it is deemed not engaged in the real estate business. Consequently, the sale of the aforesaid property is deemed a sale of capital asset subject to the 6% final capital gains tax but not subject to the 12% VAT. Moreover, real property, which is idle and vacant and had not been used in the ordinary course of trade or business nor had it ever been classified as property of a kind which would properly be included in the inventory if on hand at the close of the taxable year, nor had it ever been held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, the income derived from the sale thereof is not subject to the expanded withholding tax under Section 2.57.2 (J) of Revenue Regulations No. 2-98, but only to the 6% capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the same Code, based on the gross selling price or fair market value (FMV) as determined in accordance with Section 6 (E) of the Code, whichever is higher. Lots or improvements, classified as "investment properties" which are idle, unproductive and unimproved since the time of acquisition, and do not fall under any of the assets enumerated under Section 39 (A) (1) of the Tax Code of 1997, as amended, and 2 (b) of Revenue Regulations No. 7-2003 are classified as capital assets, the sale of which is subject to 6% capital gains tax, DST of 1.5% but exempt from 12% VAT. (BIR Ruling No. DA-152-04 dated March 31, 2004) Accordingly, we hereby confirm your opinion that the sale of the abovementioned property which has long remained idle and considered as capital asset is: (1) subject to the capital gains tax of 6% pursuant to Section 27 (D) (5) of the Tax Code of 1997, as amended; (2) subject to DST at the rate of P15.00 for each P1,000.00 or fractional part thereof in excess of P1,000.00, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 of the Tax Code of 1997, as amended; and IHaECA (3) exempt from 12% VAT, the property not being primarily held and offered for sale or lease to customers in the ordinary course of The Company's trade or business, as provided under Section 109 (w) of the Tax Code of 1997, as amended. (BIR Ruling No. DA-270-04 dated May 17, 2004) This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, however, it is 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