Real and Other Properties Owned or Acquired (ROPOA) by Philippine National Bank, Treated as "Ordinary Asset"

June 29, 1998 BIR RULING NO. 103-98 39 (A) (1)-000-00-103-98 Philippine National Bank Financial Center Pasay City Attention: Ms . Ligaya R . Gagolinan Vice President Gentlemen : This refers to your letter dated March 4, 1998 requesting for a ruling as to whether or not real and other properties owned or acquired (ROPOA) by the PNB, consisting of lands and/or buildings are considered as capital assets. It is represented that as defined in the Manual of Accounts of the Bangko Sentral ng Pilipinas covering Expanded Commercial and Commercial Banks, ROPOA represents real and other properties, other than those used for banking purposes or held in the investment portfolio, acquired by banks in settlement of loans and/or for other reasons; that most of such properties of the bank (PNB) were acquired through foreclosure of collaterals of clients/borrowers who were unable to pay their accounts with the PNB; that these properties, when awarded to the PNB as highest bidder, are recorded as ROPOA and included in the inventory of properties for sale to the public in the ordinary course of banking operations in order to recover from the proceeds therefrom the amount receivable from the defaulting borrowers; that Section 39 of Republic Act No. 8424 defines capital assets as property held by the taxpayer (whether or not connected with his trade or business), but does not include the following: 1. 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; 2. property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; 3. property used in the trade or business of a character which is subject to depreciation allowance, or 4. real property used in the trade or business of the taxpayer. and that based on the foregoing definitions, you are of the opinion that PNB's ROPOA falls under the definition of an ordinary asset and the sale thereof is not subject to the 6% final tax imposed under Section 27(D)(5) of the Tax Code of 1997. In reply, please be informed that based on the aforesaid definition of the term "capital assets", PNB's ROPOA which represents real and other properties, other than those used for banking purposes or held in the investment portfolio, acquired in settlements of loans and/or for other reasons, most of which were acquired through foreclosure of collaterals of client borrowers who were unable to pay their warrants with PNB, should be treated as "ordinary asset" of PNB and therefore, the sale, exchange or other disposition of such properties will not be subject to the capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997. cdlex Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue