An Ordinance Amending City Ordinance No. 07-2011, Otherwise Known as "An Ordinance Enacting the Revenue Code of Tuguegarao City," by Incorporating a New Provision Particularly Chapter 5, Article A, Section 5A.02

November 10, 2008 BIR RULING [DA-(C-126) 406-08] 27 (D) (5); RR 7-2003; 196; DA 219-05; DA 201-06 Philippine United Foundry & Machinery Corporation 76 Balon-Bato, Balintawak, Quezon City Attention: Lim Chian Young President Gentlemen : This refers to your letter dated November 4, 2008 requesting confirmation of your opinion that: 1. The vacant and/or idle property covered by TCT No. T-57616 which was never used by PUFMC in its trade or business, nor subjected to depreciation, nor included in its stock in trade or inventory, nor held primarily for sale or lease to customers in the ordinary course of its trade or business, and never rented out to any one since its acquisition, is classified as capital asset in the hands of PUFMC; 2. The sale of the said vacant and/or idle real property covered by TCT No. T-57616 classified as capital asset in the hands of PUFMC is subject to the 6% capital gains and documentary stamp taxes pursuant to Sections 27 (D) (5) and 196 (b) of the Tax Code of 1997; and 3. The sale of the vacant and/or idle real property, not being used in the ordinary course of the trade or business of PUFMC is not subject to the 12% value-added tax. It is represented that PHILIPPINE UNITED FOUNDRY & MACHINERY CORPORATION ("PUFMC", for brevity) is a domestic corporation duly registered with the Securities and Exchange Commission primarily engaged in the manufacture, process, import, export, barter, buy, sell, distribute, or otherwise deal in, at wholesale, charcoal and electric flat irons, soil pipes, cast iron cooking pots, construction materials, machinery spare parts and accessories, aluminium by-products such as pots, inggots, etc., goods, wares, and merchandise of all kinds, class, and descriptions which are the lawful objects of commerce; that PUFMC is the registered owner of a parcel of land situated in Cabuyao, Laguna, which is embraced under Transfer Certificate of Title (TCT) No. T-57616 issued by the Registry of Deeds for Calamba City; that this parcel of land has never been developed or used by PUFMC in the ordinary course of its trade or business; that from the time of its acquisition in the name of PUFMC, this property has remained vacant and idle and was not held and owned primarily by PUFMC for sale to customers in the ordinary course of its trade or business; that this asset had been classified as "investment" in the books of the corporation; that it was not subjected to depreciation, nor included in the inventory of property for lease, and never offered for rent or actually leased to anybody since its acquisition and as such it has always been treated by PUFMC as capital asset; that PUFMC did not derive any income at all from the said property; and that since the subject property produces no income at all to the company and due to lack of interest of the PUFMC in maintaining the said property, the Board of Directors of PUFMC has decided to sell the subject property to any interested buyer. In reply, please be informed that Sec. 27 (D) (5) of the 1997 NIRC, as amended, provides that a final tax of six percent (6%) is imposed on the gains presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Sec. 6 (E) of the said Code, whichever is higher, of such lands and/or buildings. SATDEI The term "capital asset" is negatively defined in Section 39 (A) (1) of the Tax Code, as ". . . property held by the taxpayer (whether or not connected with his trade of 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 Sec. 34; or real property used in trade or business of the taxpayer". Thus, where the property has remained undeveloped, idle and vacant, does not form part of the inventory of the taxpayer for sale or lease to customers, not actually used in business, and is aptly recorded as investment property in the corporate books, this Office has consistently ruled that the same shall be considered as capital asset and the gain presumed to have been realized from its sale will be subject to the CGT when sold. (BIR Rulings DA-163-05 dated April 14, 2005, DA-040-03, DA-008-04 dated January 6, 2004, DA-152-04, DA-270-04 dated May 17, 2004, DA-155-05 dated April 14, 2005, DA-219-05 dated May 5, 2005) It is noted, however, that under Revenue Regulations (RR) No. 07-03, all real properties acquired by a taxpayer that is habitually engaged in the real estate business shall be considered ordinary assets. Sec. 2, pars. (d), (e) and (f) of RR No. 7-2003, defines the persons engaged in the real estate business, 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. "e. Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale or lease. "f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent." Based on the above definitions, PUFMC, whose primary purpose is to engage in the manufacture and sale of flat irons, soil pipes, and other merchandise, is clearly not a company habitually engaged in the real estate business. Moreover, since the subject property has, from the time of its acquisition, remained idle, vacant and undeveloped, and was never used in the conduct of PUFMC's business, the property does not fall within the definition of an ordinary asset as held in BIR Ruling DA-201-06 dated April 3, 2006, citing BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003, viz.: ". . . Considering that RS is not real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to carry on its agricultural business, the parcels of land to be sold by RS are not stock in trade or other real property of a kind which would properly be included in RS' inventory if on hand at the close of the taxable year. Nor are they real property held primarily for sale or lease to customers in the ordinary course of trade or business." Likewise, in BIR Ruling No. 014-03 dated October 28, 2003, it was ruled that for a property to be considered an ordinary asset, it must be actually used in the business of the corporation. The BIR stated that on the condition that the taxpayer concerned was not habitually engaged in the real estate business, the property not actually used in the business of the taxpayer, the same having remained idle and undeveloped, was considered a capital asset. Considering that the property involved was recorded in the books of PUFMC under the account name of investments; that the property has been idle since its acquisition; that PUFMC has not introduced any improvements on the said property, that PUFMC did not include as part of its inventories the said property nor did it derive any rental income at all, it is the considered opinion of this Office that the said property is considered capital assets. As such, the sale of the said property shall be subject to the capital gains tax under Section 27 (D) (5) of the Tax Code of 1997. TcHEaI Accordingly, this Office hereby confirms your opinion as follows: 1. The subject realty of PUFMC, which has remained vacant, idle, unproductive and unimproved since the time of acquisition, do not fall under any of the assets enumerated under Section 39 (A) (1) of the Tax Code of 1997 and Section 2 (b) of Revenue Regulations No. 7-2003 and is properly classified as capital assets; 2. The sale of the aforesaid properties covered by TCT No. T-57616 which was classified as capital assets, is subject to Capital Gains Tax at the rate of 6% on the gain presumed to have been realized from the sale or transfer pursuant to Section 27 (D) (5) of the Tax Code of 1997 and to the Documentary Stamp Tax at the rate of P15.00 for each P1,000.00 or fractional part thereof in excess of P1,000.00 based on the consideration or fair market value of the property whichever is higher pursuant to Section 196 of the same Code. (BIR Ruling Nos. DA-152-2004 dated March 31, 2004, DA-155-2005 dated April 14, 2005 and DA-168-2005 dated April 15, 2005) and; 3. The sale of the said vacant and/or idle real property, not being used in the ordinary course of the trade or business of PUFMC, is not subject to the 12% value-added tax. (BIR Ruling Nos. DA-024-2001 dated February 26, 2001 and DA-397-2000 dated November 20, 2000). 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service