BIR Ruling [DA-012-04]

January 12, 2004 BIR RULING [DA-012-04] 73; 188 DA-099-2003; DA-280-2003 Victoria Homes, Inc. RCR Business Centre 402 E. Rodriguez Avenue, Cubao, Quezon City Attention: Mr. Rodrigo C. Reyes President Gentlemen : This refers to your letter dated November 7, 2003 requesting for a ruling that the rescission of a Deed of Assignment in connection with a tax-free exchange between Victoria Homes, Inc., as the transferor and Anaped Estate, Inc., as the transferee and the execution of a Deed of Reconveyance as a consequence thereof, is not subject to the capital gains tax, withholding tax and documentary stamp tax. Based on your representations, as well as from the documents submitted, the facts are as follows: 1. On October 21, 1985, a Deed of Exchange was executed by and between Victoria Homes, Inc. as the Transferor, and Anaped Estate, Inc., as the Transferee. The transferor, being the absolute and registered owner of several parcels of land located at Barrio Tunassan, Muntinlupa City, and within the Victoria Homes Subdivision, with an aggregate area of Seventy One Thousand Three Hundred Fifty Five (71,355) square meters, bartered and exchanged the aforesaid real properties to the Transferee in exchange for shares of the latter (said titles are now in the name of Anaped Estate, Inc. covered by several Transfer Certificates of Title). 2. On August 24, 1987, the same parties executed a Deed of Exchange whereby Victoria Homes, Inc., as the Transferor and the absolute and registered owner of several parcels of land located at Barrio Tunassan, Muntinlupa City, and within the Victoria Homes Subdivision, with an aggregate area of Eighteen Thousand Eighty One (18,081) square meters, bartered and exchanged the aforesaid real properties in favor of Anaped Estate, Inc., as the Transferee in exchange for shares of the latter (said titles are now in the name of Anaped Estate, Inc. covered by several Transfer Certificates of Title). 3. Pursuant to the said two Deeds of Exchange, Victoria Homes, Inc. had transferred all its titles over the 71,355 and 18,081 square meters of land, thereby causing the cancellation of the old titles and the issuance of new ones in the name of Anaped Estate, Inc. On the other hand, Anaped Estate, Inc. had failed to deliver to Victoria Homes, Inc. the corresponding 7,500 shares of stocks as well as the shares of stocks covering the value of Four Hundred Eighty One Thousand Eight Hundred Pesos (P481,800.00) of Anaped Estate, Inc. thereby failing to comply with what was incumbent upon it under the two Deeds of Exchange. 4. After the aforesaid transfer, Anaped Estate, Inc. also failed to develop and improve the said properties for lack of sufficient funds. The respective parties' Board of Directors at their Special Meeting have unanimously approved that the parties (Transferor and Transferee) shall reconvey unto each other by way of Deed of Reconveyance the properties which they have previously exchanged with each other. 5. In support of your request, you submitted the following documents: (1) Deed of Exchange dated October 21, 1985 with the attached list of 103 properties subject thereof; (2) Deed of Exchange dated August 24, 1987 with the attached list of five (5) properties covered by TCT Nos. 141368; 184344; 149866; 150011; and 149999; (3) Deed of Rescission of Previously Executed Deeds of Exchange; and (4) Deed of Reconveyance. IHaSED In reply thereto, please be informed that rescission of a contract does not give rise to a taxable event for two reasons: (a) the result of rescission is that it is as if there was no sale, transfer or exchange, and hence, no income is realized; and (b) the return of the object of the rescinded contract is not for monetary consideration and is merely an acknowledgment or confirmation of the title and ownership of the original owner of the property. (BIR Ruling No. DA-280-2003 dated August 25, 2003) Thus, the subsequent return of the One Hundred Three (103) parcels of land subject of the Deed of Exchange dated October 21, 1985 as well as the five (5) parcels of land subject of the Deed of Exchange dated August 24, 1987 to Victoria Homes, Inc. is a necessary consequence of a rescission of the contract. In BIR Ruling No. 059-92 dated February 18, 1992, citing Article 1191 of the Civil Code on contract rescission, it was ruled that no gain shall be recognized on the return of the real property upon the rescission of a deed of absolute sale resorted to by the buyer due to the seller's non-compliance with his obligation to deliver the realty sold. It was likewise ruled that the deed of rescission shall not be subject to the documentary stamp tax under Section 196 of the Tax Code of 1997, but only to the documentary stamp tax of P15.00 under Section 188 of the same Code. Accordingly, the subsequent return of the aforesaid properties to Victoria Homes, Inc. is not subject to the capital gains, withholding and documentary stamp taxes since it is a mere reconveyance of the object of the rescinded contract and is not for monetary consideration. Besides, Section 73 of the Tax Code of 1997 provides that only distribution made by a corporation to its shareholders out of its earnings or profits, whether in money or property are taxable. (A. Soriano Corporation vs. Commissioner of Internal Revenue, CTA Case No. 3710, July 4, 1991, affirmed in Commissioner vs. A. Soriano Corporation and CTA, CA-G.R. SP No. 26017, January 15, 1993; Commissioner vs. Brown, CA (7) 69 Fd. 602) Under the aforesaid contract between Victoria Homes, Inc. and Anaped Estate, Inc., there is no provision regarding any distribution of corporate earnings or profits by Anaped Estate, Inc. THEREFORE, Victoria Homes, Inc. will not realize any taxable gain from the return of the aforesaid properties. Victoria Homes, Inc. will not receive any net beneficial income nor realize any income which is required by the Tax Code for redemption of the properties to be a taxable event. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service