Real Properties Received by Way of "Dacion En Pago/Exchange/Offset Arrangement" Classified as Ordinary Assets

May 25, 1999 BIR RULING NO. 071-99 39 (A) (1)-061-96-071-99 Hooven Phils., Inc. H Floor, Strata 200 Bldg., Emerald Avenue, Pasig City 1605 Attention: Mr . Herbert S . Dee, Jr . Chairman & President Gentlemen : This refers to your letter dated May 5, 1999 concerning your request for a confirmation that the real properties (condominium units) received from a number of your clients by way of " dacion en pago /exchange/offset arrangement" should be classified as ordinary assets in the hands of Hooven Phils . , Inc . (HOOVEN) . It is represented that HOOVEN is engaged in the business of contracting for aluminum fabrication and installation construction projects with some real estate/condominium developers; that due to the economic crisis that hit the country since last year, a number of our clients settled their obligations to you thru dacion en pago /exchange/offset arrangement; that you carry these assets in your inventory and intended for sale for immediate liquidation hence, may be considered as real properties for use in your trade or business. llcd In reply, please be informed that under Section 39(A)(1) of the National Internal Revenue Code of 1997, the term "capital assets" has been defined as follows: "SEC. 39. Capital Gains and Losses . (A) Definitions . As used in this Title (1) 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 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 ." LibLex Since, as represented, you have been holding the real estate properties conveyed to you by way of dacion en pago as part of your inventory, not intended for capital investment but carried as part of your inventory available for sale or immediate liquidation, then these assets are properly constituted as ordinary assets and not capital assets. Accordingly, the aforementioned condominium units are ordinary assets in the hands of HOOVEN pursuant to the above-cited provision of the Code. Such being the case, your sale of these condominium units is not subject to the final capital gains tax imposed under Section 27(D)(5) of the said Code. Rather, your income from the sale of these real properties shall be subject to the normal corporate income tax imposed under Section 27(A) of the said Code. (BIR Ruling No. 061-96). This ruling is based on the facts as represented. However, if upon investigation it will be determined that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group