BIR Ruling [DA-063-06]

February 28, 2006 BIR RULING [DA-063-06] 73, 188; DA-385-2004 Castillo Escano and Fandialan Law Offices 4 Hectan Commercial Center Halang, Calamba City Attention: Atty. Conrado R. Castillo Gentlemen : This refers to your letter dated January 18, 2006 requesting for a confirmation of your opinion that the reconveyance of a real property by Natas-ya Enterprises, Inc. to your client, Cesar P. Uy pursuant to a Deed of Rescission and Reconveyance is not subject to capital gains tax and documentary stamp tax. The facts as you represented are quoted as follows: "I- Our client, CEZAR P. UY, (to be referred as the FIRST PARTY), is the owner of a parcel of land situated at Barangay Holy Spirit, Diliman, Quezon City, covered by and described in Transfer Certificate of Title (TCT) No. RT-5390 (357373) of the Registry of Deeds of Quezon City. II- The property aforementioned is fully occupied by squatters who have erected thereon dwelling and commercial structures, and who refused to vacate the property and return the possession thereof to the FIRST PARTY notwithstanding repeated demands to vacate, remove their illegal structures, and return and deliver the possession of the said property to the FIRST PARTY. Thus, it was necessary to file ejectment proceedings in the proper court of Quezon City. III- In order to shield, however, the FIRST PARTY against any personal violent reprisals by squatters arising from any suit to evict from the said property, the FIRST PARTY believed it was necessary to temporarily transfer the title of the property to a corporation who will pursue the necessary legal action against the squatters. IV- Natas-ya Enterprises, Inc. (to be referred as the SECOND PARTY) agreed to accommodate the SECOND PARTY and a MEMORANDUM OF AGREEMENT was executed by the parties on 26 January 1996. Briefly, it was agreed that: a.) The parties will execute a DEED OF EXCHANGE whereby the FIRST PARTY shall transfer in trust the title to the property to the SECOND PARTY purportedly in exchange for shares in the Capital Stock of the SECOND PARTY equal to Three Million Pesos (P3,000,000.00). b.) The SECOND PARTY shall commence in its name the appropriate legal action to evict the squatters as soon as the property has been transferred in its name, and to prosecute said action to its conclusion, provided, however, that all expenses incurred in the prosecution of the action to evict the squatters shall be borne exclusively by the FIRST PARTY. DcTAIH c.) It is explicitly and clearly agreed that as soon as the property is cleared of all squatters and all cases between the SECOND PARTY and the squatters are terminated by final judgement, the parties shall execute a DEED OF RESCISSION AND RECONVEYANCE to restore status quo and vest to the FIRST PARTY the title to the property. d.) It is further stipulated that since the transfer of the property is a mere arrangement to enable the FIRST PARTY to commence legal action against the squatters without fear of reprisal, no shares in the Capital Stock of the SECOND PARTY shall be issued in favor of the FIRST PARTY notwithstanding anything to the contrary that might be stipulated in the DEED OF EXCHANGE to be executed thereafter by the parties. V- On January 26, 1996 the DEED OF EXCHANGE was executed by the parties. It was registered in the office of the Register of Deeds of Quezon City on July 25, 1997 thereby canceling TCT No. RT-5390 (357373) and in lieu thereof TCT No. N-179573 was issued in the name of Natas-ya Enterprises, Inc. VI- Notwithstanding the issuance of a new title in the name of Natas-ya Enterprises, Inc. The FIRST PARTY being still the true and actual owner, retained the possession of the Title of the property. And more than that, as an exercise of absolute ownership, the FIRST PARTY is absolutely free to deal with it and enter into any transaction affecting the same. Thus, the FIRST PARTY mortgaged the property in favor of Anita L. Papa (Entry No. 6554/RT-5390) to guarantee a principal obligation in the sum of P8,000,000.00 executed on May 9, 1997. This mortgaged was amended and increased to P10,000,000.00 on July 24, 1997 (Entry No. 7610/RT-5390). Both mortgages were duly registered and annotated at the back of the Title (TCT N-179573). The fact that the FIRST PARTY mortgaged the property to a Third Party for P10,000,000.00 when it was supposed to be exchanged with P3,000,000.00 worth of shares of stocks of the SECOND PARTY only shows and confirms the fact that the Deed of Exchange was simulated and only for accommodation. Such being the case, no stock certificate in the capital stock of Natas-ya Enterprises, Inc. was issued to the FIRST PARTY. VII- Pursuant to the said agreement, a COMPLAINT for ejectment was filed by Natas-ya Enterprises, Inc. against Josephine Villegas and her other 31 co-defendants before the Metropolitan Trial Court of Metro Manila, National Capital Judicial Region, Branch 40, Quezon City with Civil Case No. 18495 in 1998. VIII- As the purpose of the accommodation and trust agreement evidenced by the Memorandum of Agreement had already been accomplished, the parties now executed a DEED OF RESCISSION AND RECONVEYANCE whereby the Deed of Exchange is rescinded, set aside and rendered null and void and the property covered by TCT No. N-179573 is reconveyed to the FIRST PARTY in order to restore status quo." In reply, please be informed that since the transfer of the aforestated property by Natas-ya Enterprises, Inc. in favor of Cesar P. Uy is without monetary consideration, the same is not subject to the capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997. (DA-385-2004 dated July 16, 2004) Likewise, the conveyance of realties to trustees or other persons without consideration is not taxable under Section 185 of the Revised Documentary Stamp Tax Regulations. Thus, the Deed of Rescission and Reconveyance executed by and between Natas-ya Enterprises, Inc. and Cesar P. Uy made without monetary consideration is not subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code. However, the notarial acknowledgement to the said deed is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. The transfer of the above-mentioned property is exempt from the donor's tax imposed under Section 98 of the same Code due to lack of donative intent on the part of the trustee. (BIR Ruling No. DA-646-2004 dated December 21, 2004) 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 as null and void. THEDCA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service