BIR Ruling No. 142-11

May 4, 2011 BIR RULING NO. 142-11 RR 7-2003; 00-000 Atty. Rufino R. Tan Unit 1705, Antel Global Corporate Center Julia Vargas Avenue, Ortigas Center Pasig City Sir : This refers to your letter dated June 21, 2010 requesting on behalf of your client, West Spring Development Corporation (West Spring), for a ruling that the sale of its five (5) parcels of land with an aggregate area of 2,542 is classified as capital assets, subject to the 6% final capital gains tax and the corresponding documentary stamp tax (DST) but not to value-added tax (VAT). It is represented that West Spring is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 03400 with TIN 004-870-460; that it is primarily organized to "engage in general construction and other allied business including the constructing, enlarging, repairing, removing, developing, or otherwise engaging in any work upon buildings, roads, highways, manufacturing plants, bridges, airfields, piers, docks, mines, shafts, waterworks, railroads, railway structures, all iron, steel, wood, masonry and earth construction, and to make, execute, bid for and take or receive any contracts or assignment of contracts therefore, or in relation thereto, or connected therewith and to manufacture and furnish building materials and supplies connected therewith; and doing of any and all other business and contracting incidental thereto or connected therewith, and the doing and performing of any and all acts and things necessary, proper or convenient for and incidental to the furtherance and/or implementation of the purposes therein mentioned." that on the other hand, its secondary purposes, among others, provide that "To purchase, acquire, own, lease, sell and convey real properties such as lands, buildings, factories and warehouses and machineries, equipment and other personal properties as may be necessary or incidental to the conduct of the corporate business, and to pay in cash, shares of its capital stock, debentures and other evidences of indebtedness, or other securities, as may be deemed expedient, for any business or property acquired by the corporation." that West Spring, a construction company, acquired several subdivided vacant lots with a total area of 25,598 square meters through a Deed of Assignment executed on August 3, 1998 by Joaquin H. Rodriguez, Jr. in exchange for the shares of stock of the former; that after 12 years of planning and attempting to join biddings of big construction projects, coupled with the setting in of the economic recession, the Board of Directors and stockholders of West Spring decided not to go through with its plan to do construction business; that West Spring decided to sell and dispose of these lots after which, the corporation will be dissolved and distributed the proceeds as liquidating dividends after payment of all its liabilities; and that on October 27, 2010, a Deed of Absolute Sale was executed by West Spring, as the Vendor, in favour of CHMI Land, Inc., as the Vendee, whereby the former transferred to the latter the above-mentioned five (5) parcels of land with an aggregate area of 2,542 square meters covered by TCT Nos. 010-2010001408, 010-2010001407, 010-2010001406, 010-2010001434 and 010-2010001433 all issued by the Registry of Deeds for Paraaque City. Based on the foregoing representations, you now request confirmation of your opinion that the sale of the above-mentioned lots will be subject only to capital gains tax and the corresponding documentary stamp tax but not to value-added tax. In reply thereto, please be informed that Section 3 (4) (e) of Revenue Regulations No. 7-2003, provides that "(e) Treatment of abandoned and idle real properties. Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Real property initially acquired by a taxpayer engaged in the real estate business shall not result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle. Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2(g) hereof are automatically converted into capital assets upon showing proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties." Considering that West Spring is not only engaged in general construction but likewise engaged in the sale and conveyance of real properties as provided in the secondary purposes of its Articles of Incorporation, the subject properties are deemed ordinary assets. The fact that the said properties remained idle and abandoned for more than two (2) years will not convert the said ordinary assets into capital assets. Thus, its subsequent disposition will be considered a sale of ordinary assets. WHEREFORE, in view of the foregoing, this Office REGRETS to inform you that the sale of the above-mentioned vacant lots by West Spring Development Corporation, being classified as ORDINARY ASSETS, is subject to the creditable withholding tax as prescribed in Revenue Regulations No. 2-98, as amended, and to the corresponding documentary stamp tax imposed under Section 196 of the Tax Code of 1997 likewise SUBJECT to the 12% VAT pursuant to Section 108 (A), supra , as implemented by Revenue Regulations No. 16-2005, as amended. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, however, it is disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue