Seven Sisters Corporation

December 23, 2009 BIR RULING [DA-(C-344) 830-09] 27 (D) (5); 39 (A); 106; 197-2007; DA-692-2006; DA-155-05; DA-653 & 654-2006; DA (C-40) 541-2003 Seven Sisters Corporation No. 70 San Rafael St., Kapitolyo Pasig City Attention: Ms. Rosario K. Chew Treasurer Gentlemen : This refers to your letter dated June 16, 2009 requesting a ruling on the applicability of the provisions of Sec. 27 D (5) of the Tax Code of 1997, as amended, on the sale by SEVEN SISTERS CORPORATION ("SSC", for brevity) of its real properties. DEcITS The facts as represented are as follows: SSC is a domestic corporation established under the laws of the Republic of the Philippines on December 26, 2000. SSC's primary purpose is to engage in the realty business. SSC acquired real properties from its stockholders as payment for their subscriptions. SSC, however, had never commenced commercial operation since the time of its incorporation. As a result, the real properties it owns, specifically, the parcel of land covered by Transfer Certificate of Title No. 126319 of the Registry of Deeds of Cebu City and the Condominium Unit in Pasig City covered by Condominium Certificate of Title No. PT-6359, are never utilized by the company, thus, said properties have never generated any income nor does SSC subjected the same to depreciation for purposes of deduction as it has never offered the same for lease nor consider the same as part of its inventory. Due to the impending dissolution of SSC, it has been decided by its incorporators to dispose the idle properties of the corporation converting the same to cash assets for convenience in case of liquidation. Also, due to the lack of interest of the stockholders to maintain the same, for the reason that they are spending money paying real estate taxes rather than benefiting from said properties. In view of the above, it is your position that the above properties of SSC 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) SSC, although engaged in the real estate business, has not commenced operation of its business; 2) It has held the above properties primarily as investments; 3) The properties had been unproductive since the time they were acquired by SSC; and 4) The properties never formed part of SSC's inventory of properties as it has never commenced operation. In reply, please be informed that Section 27 (D) (5) of the 1997 Tax Code, as amended, provides, viz. : "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." DCScaT 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." In the instant case, the aforementioned real properties of SSC are properly classified as capital assets because SSC holds such properties as investment. SSC never used said realties in business, hence, the above-mentioned properties were never subjected to depreciation, nor did they form part of SSC's inventory as SSC never engages in the real estate business. The said realties have never generated any income nor does SSC subjected the same to depreciation for purposes of deduction as it has not commenced its realty business from the time of its inception. Accordingly, the intended sale of said real properties by SSC shall be subject only 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. (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; BIR Ruling No. DA-219-2005 dated May 5, 2005 cited in BIR Ruling Nos. DA-653 & 654-2006, both dated November 7, 2006; Rev. Regs. No. 7-2003) Moreover, the sale of the above-mentioned real properties of SSC, treated as capital assets, is not subject to the 12% value-added tax (VAT) 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. [BIR Ruling No. DA (C-40) 541-2009 dated September 15, 2009] 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. EAcHCI Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service