Mr. Deo S. Dionisio

December 10, 2008 BIR RULING [DA-(VAT-051) 512-08] BIR Ruling No. DA-395-07 Mr. Deo S. Dionisio 318 North Bay Blvd. Navotas, Metro Manila Sir : This refers to your letter dated November 8, 2008 requesting for a ruling that your two (2) parcels of land are capital assets, the sale of which is not subject to value-added tax (VAT). As represented, you are engaged in the operation of an ice plant in the city of Navotas. You are also the absolute owner in fee simple of two (2) parcels of residential land located in Caloocan City, covered by Transfer Certificates of Title Nos. 265040 and 21766 ("Properties" for brevity). Previously, the Properties were leased to Pilipinas Shell Petroleum Corporation. However, from the pretermination of the lease in 1998, the Properties remained idle and were never offered for sale and/or lease to the public. Having later on been classified by the local government as being residential in character, you intended the Properties to be utilized as the site of your residence and/or family home. However, due to unforeseen circumstances, you were forced to sell the said properties to Araceli C. Banaag. Hence, on September 29, 2008, you executed a Deed of Absolute Sale over the Properties for the amount of PhP18,000,000.00. Subsequently, you were assessed and paid the capital gains and documentary stamp taxes thereon. Despite the payment of the above impositions, the Assistant Revenue District Officer has refused to grant the certification of payment of all taxes and/or impositions on the sale of the Properties because she is of the opinion that the sale is a transaction is subject the 12% VAT. Hence, the present recourse to this Office. aCIHcD In reply, please be informed that what constitutes capital asset is enumerated, under Section 39 (A) (1) of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337, by way of exclusion while ordinary asset is enumerated by way of inclusion under the same provision. Thus, capital asset is defined as 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 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. Section 3 (4) of Revenue Regulations (RR) No. 7-2003 provides that all real properties acquired in the course of trade or business of a taxpayer habitually engaged in the sale of real estate shall be considered as ordinary assets. 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 refers 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 the regulations (Section 2 (g), RR 7-2003). The yardstick for determining whether the property is capital asset or ordinary asset is the actual use of the said property. Accordingly, 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. Considering that 1) you are not a real estate dealer, real estate developer, and/or real estate lessor since you are engaged in the operation of an ice plant, 2) the properties have long been idle and have never been used in the business and 3) the abovedescribed parcels of land do not fall under any of the assets enumerated under Sections 39 (A) (1) of the Tax Code of 1997, as amended, and 2 (b) of Revenue Regulations No. 7-2003, the same should be properly classified as capital assets. CSHcDT In view of the foregoing, this Office confirms your opinion that the Properties are capital assets and the sale thereof is exempt from the 12% VAT as provided under Section 109 (P) of the Tax Code of 1997, as amended which provides as follows: "SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at One million five hundred thousand pesos (P1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P2,500,000) and below: Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO); xxx xxx xxx" 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. TADCSE Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service