Sale of Property Considered as Capital Asset Subject to Capital Gains Tax, Not to Creditable Withholding Tax

October 28, 2003 BIR RULING NO. 014-03 Wendell Holdings Co., Inc. D.M.W.A.I. Building 806 E. Rodriguez Sr. Boulevard Quezon City Attention: D.J. Wenceslao, Jr. Chairman Gentlemen : This refers to your letter dated June 26, 2002 requesting for confirmation of your opinion that the contemplated sale of your real property located at the Aseana Business Park, Barangay Tambo, Paraaque City is subject to capital gains tax under Section 27(D)(5) of the National Internal Revenue Code of 1997. The facts, as represented, are as follows: Wendell Holdings Co., Inc. is a corporation that was principally organized to raise investment funds either through borrowings, sale or lease of its capital assets. It is neither a real estate dealer nor a property developer. The main objective of the company for the year is to raise around 4 billion pesos of funds to be extended to its sister companies and associates in the form of loans or advances for them to carry out their contract/commitment with the government. One of its sister companies has an ongoing reclamation project for the Public Estates Authority. Once the project is completed, it is expected that PEA will take over assets estimated to have a land value of around 10 to 15 billion pesos undertaken at zero costs to the government. From the completed reclamation project, the government can now generate additional millions of pesos in income in the form of real estate, business taxes, etc. arising from business transactions in the area. It is further represented that Wendell Holdings Co., Inc. is currently in serious negotiation to sell around 15 hectares of raw land in stages of 5 hectares each. The property is still underdeveloped because the PEA has yet to construct the major infrastructure (roads, bridges) that will link the property to be sold to the highway. Currently, the property is not being serviced by any utilities (lights, water, telephone, etc.). The property is being negotiated for a price of Php30,000.00 per square meter payable in installment with a 25% down payment with the balance payable over a five-year period. Installment plan is being considered because the buyers would like to ensure that infrastructure will be in place before full payment is made. The buyer would also like to have the title transferred in its name upon payment of the down payment. The balance of the payment will be placed in escrow and released progressively or covered by a payment guarantee of the buyer. It is your position that the subject real property is a capital asset and its sale is subject to the capital gains tax of six percent (6%) under Section 27 (D) (5) of the NIRC of 1997. In reply, please be informed that on December 27, 2002, this Office issued Revenue Regulations No. 7-2003, "Providing the Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39 (A) (1) of the National Internal Revenue Code of 1997 for Purposes of Imposing the Capital Gains Tax under Section 24 (D) (1), 25 (A) (3), 25 (B) and 27 (D) (5), or the Ordinary Income Tax under Section 24 (A), 25 (A) and (B), 27 (A), 28 (A) (1) and 28 (B) (1), or the Minimum Corporate Income Tax (MCIT) under Section 27 (E) and 28 (A) (2) of the same Code." Section 2 of Revenue Regulations No. 7-2003 provides as follows: "SEC. 2. Definition of Terms. For purposes of these regulations, the following terms shall be defined as follows: a. Capital Assets shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets under Sec. 39(A)(1) of the Code. b. Ordinary Assets shall refer to all properties specifically excluded from the definition of capital assets under Sec. 39(A)(1) of the Code, namely: EIcSTD 1. Stock in trade of a taxpayer or other real 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 2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or 3. Real property used in trade or business ( i.e. , buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or 4. Real property used in trade or business of the taxpayer. Further, Section 27 (D) (5) of the same Code 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 land and/or buildings." 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 was acquired from D.M. Wenceslao & Associates as payment for the cash advances of the latter from the former in the reclamation of the said property. 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 taxes. This ruling is issued on the basis of the foregoing facts as represented. If upon investigation it is disclosed that the facts are different, this ruling is considered null and void. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue