Properties Acquired by Trustees Deemed Ordinary Assets

May 5, 1993 BIR RULING NO. 190-93 PROPERTIES ACQUIRED BY TRUSTEES DEEMED ORDINARY ASSETS 21 (A) 117-91 190-93 Quisumbing, Torres & Evangelista 11th Floor, Pacific Star Bldg. Makati Ave. cor. Sen. Gil J. Puyat Ave. Makati 1200, Metro Manila Attention: Attys . Leo G . Dominguez Edgardo M . de Vera Rene K . Limcaoco This refers to your letter dated October 28, 1992, stating that several individuals, both Philippine and non-Philippine citizens, intend to establish a trust fund (Trust) whose purpose shall be to purchase real property in Cebu City, Cebu (Property); that the trustee shall purchase property, hold on to said Property and subsequently sell the Property in order to profit from any property value appreciation; that the trustee shall purchase the Property for purposes of investment only and shall not be engaged in the business of regularly buying and selling real property; that the trustee shall neither develop nor lease the property; that Rizal Commercial Banking Corporation will act as trustee (Trustee) of the Trust; that the Property purchased by the Trust shall be in the name of the Trustee; that the trustee shall hold the Property for a period of not more than 5 years, after which the trustee shall sell the property; that the net proceeds of the Trust after the sale of the Property after the fifth year shall be distributed pro-rata among the investors; that your client, Dragon Fund Management, Inc. (DFMI) will be engaged by the Trustee as the management company to act as consultant, adviser and manager to the trustee in the acquisition and sale of the Property; that you are of the opinion that upon the trustee's sale of the property, the trust shall be subject to the final capital gains tax of 5% based on the gross selling price or fair market value prevailing at the time of sale, whichever is higher; and that since the trustee will not buy and sell real property on a regular basis and the Trustee shall neither develop nor lease out the property, the trustee will not be engaged in the business of buying and selling real property. In connection therewith, you now request confirmation of your opinion that since the property is considered as capital asset, upon the sale of the property, the trust shall be subject to the final capital gains tax of 5% of gross selling price or fair market value prevailing at the time of sale, whichever is higher. In reply thereto, I have the honor to inform you that Section 33(a) (1) of the Tax Code, defines capital assets in a negative way. They include all assets held by the taxpayer (whether or not connected with his trade or business) except the following: aisadc (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 the allowance for depreciation; or (4) Real property used in the trade or business of the taxpayer. Under the aforementioned representations, the properties are ordinary assets, since the same are being held by the trustee primarily for sale to customers in the business of buying and selling of real properties which is the sole purpose for the establishment of the aforementioned Trust. Accordingly, gain derived by the trustee from the sale of said properties are subject to tax under Section 21(e) of the Tax Code, as amended, and as implemented by Revenue Regulations No. 8-93. VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue