BIR Ruling No. 043-12

February 9, 2012 BIR RULING NO. 043-12 Sec. 106, Tax Code of 1997; RR 7-2003; BIR Ruling No. 027-02 Dacarnes, Inc. 8th Floor Basic Petroleum Bldg., Carlos Palanca St., Legaspi Village Makati City Attention: Marissa M. de la Cruz Gentlemen : This refers to your letter dated March 19, 2010 requesting confirmation of your opinion that the sale of real property by DACARNES, INC. is subject to capital gains tax under Section 27 (D) (5) of the 1997 Tax Code, as amended. aTADcH Documents submitted disclosed that DACARNES, INC., with TIN 003-930-017-000 and principal address at 8th Floor Basic Petroleum Bldg., Carlos Palanca St., Legaspi Village Makati City, is a domestic corporation registered with Securities and Exchange Commission (SEC) under SEC Registration No. ASO93-007725 dated October 1, 1993; that the company is engaged in real estate business; that the company is the registered owner of two (2) parcels of land located in Iloilo City covered by Transfer Certificate of Title (TCT) Nos. T-107343 (321 sq.m.) and T-108215 (11,013 sq.m.); that the said properties were acquired in 1994 and 1995 respectively; that it is represented that since incorporation, DACARNES, INC. has not engaged in the business of purchasing and selling real property, developing property for eventual sale or participating in the sale and disposition of subdivision properties; that from the time the subject properties were acquired, DACARNES, INC. neither used the properties in the ordinary course of business of the corporation nor introduced any improvements thereon; that the Auditor has noted the continuous losses sustained by the corporation since taxable year 2006 which may indicate its inability to continue as a going concern; that the company is now selling the subject properties; that it is your opinion that the property should be treated as a capital asset and the sale thereof shall be subject to capital gains tax; and that in support of your request, the following documents were submitted: 1) Copies of DACARNES, INC.'s SEC Registration, Articles of Incorporation and By-laws; 2) BIR Certificate of Registration; 3) Copies of the T-107343 and T-108215; 4) Copies of the Tax Declarations; 5) Copy of the Deed of Absolute Sale; 6) Affidavit of Non-operation; 7) Copies of the Audited Financial Statements and Annual Income Tax Returns for the taxable years 2005, 2006, 2007, 2008 and 2009; 8) Certification from Brgy. Balantang, Jaro, Iloilo as to the usage of the property; 9) Certification of No-Improvement from the Iloilo City Assessor's Office; and 10) Real Property Tax Receipts for 2010 from the Iloilo City Assessor's Office on the lots. In reply, please be informed that RR 7-2003 1 defines a real estate dealer as follows: "d. Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate." In relation with this, Section 3 (a) of the same Regulations provides: "SEC. 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or Ordinary Asset . xxx xxx xxx a. Taxpayers engaged in the real estate business. Real property shall be classified with respect to taxpayers engaged in the real estate business as follows: SaAcHE 1. Real Estate Dealer. All real properties acquired by the real estate dealer shall be considered as ordinary assets." There is no dispute DACARNES, INC. is engaged in the business as a real estate dealer which is shown by its Articles of Incorporation and financial activities. Hence, all real properties it acquired are considered ordinary assets. Section 3 (d) of the same Regulations states: "d. Taxpayers originally registered to be engaged in the real estate business but failed to subsequently operate. In the case of subsequent non-operation by taxpayers originally registered to be engaged in the real estate business, all real properties originally acquired by it shall continue to be treated as ordinary assets ." (Underscoring supplied) Thus, notwithstanding the fact that the subject properties were neither used in the ordinary course of business of the corporation nor were any improvements introduced thereon from the time they were acquired, the real properties did not lose its character of being ordinary assets and should still be continued to be treated as ordinary assets. From the foregoing provisions, since DACARNES, INC. is real estate dealer, the parcels of land that it previously acquired are considered ordinary assets and remained as such character notwithstanding the fact they stayed undeveloped since their acquisition and that the corporation failed to operate as such real estate business. Hence, the sale of the subject properties assets is not subject to capital gains tax imposed under Section 27 (D) (5) of the 1997 Tax Code, as amended, but subject to the expanded withholding tax under Section 2.57.2 of Revenue Regulations No. 2-98, as amended (BIR Ruling No. 027-02 dated July 3, 2002) , and to the documentary stamp tax imposed under Section 196 of the same Code, based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the 1997 Tax Code, whichever is higher. Moreover, since the real properties are treated as ordinary assets of DACARNES, INC., the sale thereof shall be subject to the 12% value-added tax imposed under Section 108 (A) of the Tax Code of 1997, as amended. 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, and/or any of the requirements set forth in this letter are not complied with, then this ruling shall be considered null and void. CHATcE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 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 Sections 24 (D), 25 (A) (3), 25 (B) and 27 (D) (5), or the Ordinary Income Tax under Sections 24 (A), 25 (A) & (B), 27 (A), 28 (A) (1) and 28 (B) (1), or the Minimum Corporate Income Tax (MCIT) under Sections 27 (E) and 28 (A) (2) of the same Code.