BIR Ruling [DA-076-02]

April 29, 2002 BIR RULING [DA-076-02] Sec. 21 (e); 196; 174-88 Atty. Benjamin A. Moraleda, Jr. 3rd Floor, Vargas Building, 103 Kalayaan Avenue Barangay Central, Quezon City S i r : This refers to your letters dated July 7, 2001 and August 2, 2001 stating that your client, Modesta (Remedios) Lago, was a lessee of a property located at 1549 Duhat Street, Sta. Mesa, Manila, with an area of 222 square meters and covered by TCT No. 57151 of the Registry of Deeds of Manila owned by Spouses Baltazar and Ceferina Reyes; that on October 9, 1986, spouses Reyes offered to sell to Lago the above-mentioned property for P207,875.00 on installment basis; that Lago accepted the offer and paid the first down payment on January 26, 1987 in the amount of P60,771.00 equivalent to 29.2% of the contract price; that Lago was able to complete payment on November 17, 1989 and thereafter, demanded from the spouses the Deed of Absolute Sale and the delivery of the Owner's Copy of the Transfer of Certificate of Title covering the said property; that the spouses promised to deliver to Lago the Deed of Absolute Sale and the Owner's Copy of the Transfer of Certificate of Title, but failed to comply; that in 1994, or after five years of waiting, Lago finally sued the Reyeses for Specific Performance before the Regional Trial Court of Manila, Branch 30, for the delivery of the Deed of Absolute Sale and the Owner's Copy of the Transfer Certificate of Title; that Lago also expected the Reyeses to deliver the BIR Receipts of payment of Capital Gains and Documentary Stamp Taxes; that on December 1, 1997, the Court rendered its decision in favor of Lago declaring her as the rightful owner of the above-mentioned property having purchased the same for value, and ordering the Reyeses to execute in her favor the Deed of Absolute Sale and deliver at the same time the Owner's Copy of the Transfer Certificate of Title; that the Reyeses still failed to comply with their obligation despite the Court order, prompting Lago to petition the Court for the issuance of a New Owner's Duplicate Copy of Title covering TCT No. 57151, which petition was granted by the Court, and for the Deputy Sheriff to execute the Deed of Absolute Sale in her favor; that pending the issuance of the Alias Writ of Execution ordering the Court Sheriff to execute the Deed of Absolute Sale, Lago wanted to pay the capital gains and the documentary stamp taxes, the same not being settled by the Reyeses, in order for her to transfer the title of the property in her name once the Sheriff's Certificate of Sale is issued. Based on the foregoing, you are in effect, requesting in behalf of your client for a ruling on the following: 1. Whether the capital gains and the documentary stamp taxes should be based either on the purchase price of the property in the amount of P207,875.00 or on its zonal value in 1986 or on its present zonal value; and 2. The delay in the payment of taxes on the above-mentioned transfer of property to Modesta (Remedios) Lago is not subject to penalty and surcharges considering that the delay was not caused by her, but by matters beyond her control. In reply, please be informed as follows: 1. Under Section 21(e) of the Tax Code of 1977, as amended, the law in force at the time the above-mentioned property was sold to Modesta (Remedios) Lago, capital gains realized from sale, exchange or other disposition of real property located in the Philippines classified as capital assets, shall be taxed at the rate of five percent (5%) based on the gross selling price or the fair market value prevailing at the time of sale whichever is higher. However, considering that the zonal valuation has been determined for the purpose of establishing a more realistic basis for real property valuation, then the zonal valuation existing at the time of sale should be taken into account. Such being the case, and as the transfer/sale of the above property occurred on January 26, 1987, the zonal valuation prescribed in Revenue Audit Memorandum Order No. 3-86, as amended by Revenue Audit Memorandum Order No. 3-86A shall apply. (BIR Ruling No. 174-88 dated May 4, 1988) 2. Since the sale of the above-mentioned capital asset to Modesta (Remedios) Lago in 1987 is deemed to be a cash sale under then Section 43 of the Tax Code of 1977, as amended (now Section 49 of the Tax Code of 1997), since the initial payment in the year of the sale exceeded twenty-five percent (25%) of the selling price, the capital gains realized therefrom should have been returned for taxation within thirty (30) days from the date the initial payment was made or within thirty (30) days from January 26, 1987. Such being the case, and since said transaction has not been reported for taxation within the period prescribed by law, the corresponding penalty, surcharges and interest shall be imposed at the rate in force at the time of sale. The fact that the delay in the payment of the aforementioned taxes was not caused by your client, but by the refusal of the sellers to comply with their obligations is not a ground to warrant the waiver of the imposition of the penalty and surcharged under Section 204 of the Tax Code, as amended. Such penalty, surcharge and interest can be justifiably collected to compensate the Government for the use of the funds by the taxpayer beyond the date when it was supposed to have been paid. TaHIDS Accordingly, there shall be imposed in addition to the tax required to be paid, a penalty equivalent to twenty-five (25%) of the amount due in case of failure to pay the tax within the time prescribed for its payment, and interest at the rate of twenty percent (20%) per annum from the date prescribed for its payment until the amount is fully paid (Section 248(3) and 249 both of the Tax Code of 1977, as amended). The foregoing is without prejudice on the part of your client to file an action against the sellers who have the direct liability to pay the capital gains tax, the documentary stamp tax and the corresponding penalty and interest thereon. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group