Sale on Installment of Parcel of Land With Improvements Subject to 6% Capital Gains Tax

February 25, 1999 BIR RULING NO. 021-99 27 (D) (5)-000-00-021-99 Tax Counseling Integrated Unit 2204-C, PSE Centre Tower I, Exchange Road Ortigas Center, Pasig City Attention: Atty . Tirso A . Tejada S i r : This refers to your letter dated November 23, 1998 requesting, on behalf of your client, Stag Trading Corporation (Stag), for a ruling that the sale on installment of a parcel of land with improvements thereon located at Pioneer Street, Mandaluyong City is subject to the six percent (6%) capital gains tax. Documents submitted disclosed that Stag Trading Corporation with offices located at 7 th Floor, Pacific Star Building, Sen. Gil Puyat Avenue, Makati City, is a duly registered domestic corporation primarily engaged in the business of wholesale trading, purchasing, importing, manufacturing, producing, promoting, warehousing, re-conditioning, repacking, servicing, and maintaining, marketing, distributing, supplying, exporting, selling and otherwise dealing in and with goods, wares, merchandise, commodities, products, articles, supplies, materials, machineries, appliances and equipment of whatsoever kind or nature; that Stag was formerly a domestic realty corporation registered under the firm name, Kasamahan Realty Development Corporation (KRDC); that Stag (formerly KRDC) is the absolute and registered owner of the parcels of land subject of the sale; that on February 25, 1992, a Deed of Exchange was executed between a domestic corporation, Phelps Dodge Philippines, Inc. (PDP), and KRDC whereby the former assigned, transferred and ceded the following parcels of land exclusive of all the improvements thereon in favor of KRDC in exchange for the latter's shares of stock, to wit: TCT NO. AREA (sq.m.) LOCATION VALUE 14027 (6597) 12,979 Mandaluyong, City P45,141,250.00 14028 (6595) 7,511 Mandaluyong City 29,810,800.00 14029 (6596) 3,537 Mandaluyong City 20,369,100.00 14030 (6598) 319 Mandaluyong City 2,067,120.00 14031 (6599) 17,877 Mandaluyong City 72,055,600.00 42,223 P169,443,820.00 ====== ============= that on October 22, 1993, a Lease Agreement was executed by and between KRDC as Lessor and PDP as lessee, for the lease of the subject properties having an aggregate area of 42,223 sq.m.; that on April 25, 1995, a Deed of Reformation was executed to reflect the true intention of the parties, that is, to include all the improvements on the subject properties in the Deed of Exchange executed on February 25, 1992; that the lease agreement was subsequently cancelled effective December 31, 1996; that the cancellation was due to the transfer and re-location by PDP of its manufacturing facilities, equipment and manufacturing operations to San Miguel, Tarlac since PDP needed more space for its manufacturing activities and it felt cramped and unable to expand with the limited area offered by the lease property it occupied in Pioneer Street, Mandaluyong City; that PDP was able to acquire over a two-year period and completed in December 1995 lots inside the San Miguel industrial zone with an aggregate area of 184,639 sq. m. which was better suited for its manufacturing requirements as the fabricator of copper cables, telephone wires, transmission lines and others; that Stag decided to restructure itself as a new trading company actively engaged in the buy and sell of products and merchandise; that it secured a business license in January 1997 as a trader and after surrendering its old license as a real estate dealer; that starting January 1, 1997, Stag stopped receiving any rental from PDP and all its income for the entire taxable year of 1997 came exclusively from its trading activities; that the aforementioned properties are the subject matter of a proposed sale transaction, by and between Stag and Kabayan Realty Corporation (Kabayan), on a deferred payment basis with a downpayment in excess of twenty-five percent (25%) of the gross selling price; that the balance of the selling price is payable over a period of about two (2) years; that no transfer of title over the property will take place until the full amount of the selling price is paid by the buyer, Kabayan; that the documents of title and deed of sale, together with the relevant corporate records of Stag and Kabayan will be deposited with a bank acting as escrow agent designated by both parties; and that the deferred payment sale will be treated as completed as of the signing of the document of sale and receipt of the stipulated downpayment paid by the seller from the buyer. It is further represented in your supplemental letter dated February 16, 1999, that it is your position that although depreciation was claimed on the improvements for the year 1997, the properties as a whole (land and improvements) are now capital assets since they have ceased being used in trade or business by Stag from the time that the former lessee thereof, PDP, terminated the lease contract and relocated to San Miguel, beginning year 1997; that the auditors of Stag continued to subject the buildings and improvements to depreciation in 1997 simply because the same remained part of Stag's assets, which is in accordance with generally accepted accounting practice; and that since Stag is agreeable to the disallowance of the depreciation deduction on the buildings and improvements during calendar year 1997 as the same may have been erroneously claimed, Stag will amend its 1997 income tax return and pay the deficiency income tax based on a recomputation of its 1997 income tax liability resulting from the disallowance of the depreciation deduction. In reply, please be informed that under Section 27(D)(5) of the Tax Code of 1997, a final tax of six percent (6%) is imposed on the gains presumed to have been realized in the sale, exchange or disposition of lands and/or buildings which are not actively used in the business of a corporation and which are treated as capital assets based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher. prcd Such being the case, this Office is of the opinion as it hereby holds that the aforementioned real properties located at Pioneer Street, Mandaluyong City, consisting of land with an aggregate area of 42,223 square meters and the buildings and other improvements therein, may qualify as capital assets, and the sale thereof may be subject to the final tax of six percent (6%) based on the gains presumed to be realized from the sale, pursuant to Section 27(D)(5) of the Tax Code of 1997, subject to the following conditions: 1. Revenue District Office No. 41, Mandaluyong City which has jurisdiction over the properties, shall conduct, an ocular inspection to determine whether or not the properties are being used in trade or business. The report of findings on the ocular inspection shall be submitted by the duly authorized Revenue Officer to the Revenue District Office No. 41 at the time that the taxpayer files the corresponding tax return and pays the tax due thereon. 2. The taxpayer shall file an amended income tax return for the year ended December 31, 1997 with the Revenue District Office No. 41, Mandaluyong City, and pay the deficiency income tax, if any, plus surcharge and interest, based on its adjusted taxable income tax resulting from the disallowance of the depreciation deduction erroneously claimed in the original 1997 tax return. LLphil 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 and the Revenue District Office shall impose on the gain derived from the sale thereof the appropriate corporate income tax under Section 27(A) of the Tax Code of 1997. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue