BIR Ruling [DA-073-02]

April 22, 2002 BIR RULING [DA-073-02] RR 2-98; 196 Mr. Cesar S. Espaa 489 T. Molina Baler, Aurora S i r : This refers to your letter dated August 14, 2001 requesting for exemption from the payment of capital gains and documentary stamp taxes on the conveyance of a parcel of land in your favor by the Land Bank of the Philippines (Land Bank for brevity). Documents submitted disclose that sometime in 1982 you and your wife obtained a loan from Land Bank secured by a mortgage over real property covered by TCT No. T-9002 issued by the Registry of Deeds of Baler, Aurora; that you were delayed in paying your loan to Land Bank for which reason your account was declared overdue and your above-mentioned mortgaged property was extra-judicially foreclosed under Act 3135, as amended; that at said foreclosure proceedings, Land Bank was the highest bidder and eventually purchased the mortgaged property; that you failed to redeem your property; that as a result, Land Bank consolidated its title over the property which led to the cancellation of TCT No. T-9002 and the issuance of TCT No. T-22389 in the name of Land Bank; that you believed that there was a factual defect in the foreclosure proceeding and non-compliance with the legal requirements set forth under Act 3135, as amended; that in view thereof, you filed a civil complaint for annulment of foreclosure and reconveyance of property against Land Bank which was docketed Civil Case No. 525, raffled to the Regional Trial Court of Baler, Aurora, Branch 66; that in order to put an end to the litigation, you and Land Bank entered into a Compromise Agreement which you submitted to court for approval; that the Regional Trial Court of Baler, Aurora, Branch 66, approved the said Compromise Agreement as per Order dated July 2, 2001 which state in part: "2. As consideration, therefore, Land Bank hereby releases and reconveys to Spouses Espaa the ownership of the parcel of land with an area of 936 square meters, situated at Poblacion, Baler, Aurora and covered by TCT No. 22389 which at present is in the name of Land Bank. This is the same real property which was mortgaged by Spouses Espaa to Land Bank and previously covered by Transfer Certificate of Title No. T-9002 issued by the Register of Deeds of Baler, Aurora." ETHaDC that in order to implement the said Compromise Agreement, a Deed of Absolute Sale was executed by Land Bank on June 15, 2001 transferring the above subject property to you for and in consideration of the sum of One Hundred Fifty Thousand Pesos (P150,000.00) representing the loan amount plus interest and administrative charges; and that the appraised value of the subject property as of September 2000 is Three Hundred Eighty Thousand Four Hundred Pesos (P380,400.00). In reply, please be informed that since the transfer/disposition in question was executed on June 15, 2001, Sec. 2.57.2(J) of Revenue Regulations No. 2-98, as amended shall apply. Under the said provision, except as otherwise provided, there shall be withheld a creditable income tax rates from the following items of income payment to persons residing in the Philippines: "(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule Those which are exempt from a withholding tax at Source as prescribed in Sec. 2.57.5 of these Regulations Exempt With a selling price of five hundred thousand Pesos (P500,000.00) or less 1.5% With a selling price of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000.00) 3.0% With selling price of more than two million pesos (P2,000,000.00) 5.0% "A seller/transferor must show proof of registration with HLURB or HUDCC to be considered as habitually engaged in the real estate business . . ." The foregoing creditable withholding tax rates apply to sale or disposition of real properties by a taxpayer who is habitually engaged in the real estate business. Categorically, under Section 39 of the 1997 Tax Code, these properties held by a taxpayer primarily for sale in the ordinary course of trade or business are considered as ordinary assets, the same being excluded in the definition of "capital asset". Moreover, in BIR Ruling No. 103-98 dated June 29, 1998, this Office had the occasion to rule that real and other properties owned or acquired (ROPOA) by banks, which represents real and other properties acquired in settlements of loans and/or for other reasons, most of which were acquired through foreclosure of collaterals of client borrowers who were unable to pay their warrants with the banks, should be treated as "ordinary asset" therefore, the sale, exchange or disposition of such properties will not be subject to the capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997. In view of the foregoing and since at the time of the sale/transfer of the above subject property banks are considered to be habitually engaged in the real estate business ( BIR Ruling No. 143-99 dated September 14, 1999 ), a creditable withholding tax at the rate of 1.5% based on the fair market value or zonal value determined in accordance with Section 6(E) of the Code, whichever is higher, shall be imposed upon Land Bank pursuant to Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended. On the other hand, under Section 196 of the 1997 Tax Code, a conveyance or deed whereby realty is assigned or transferred to the purchaser is subject to documentary stamp tax at the rate of one and one-half percent (1.5%) based on the consideration or value received or contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of the same Code, whichever is higher. Such being the case, the aforesaid sale/transfer of property by Land Bank in your favor is subject to the documentary stamp tax herein imposed. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. CAcEaS Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group