A.L. De Castro Const. and Land Dev't. Corp.

February 8, 2007 BIR RULING [DA-082-07] DA-072-2000; DA-015-97; Secs. 24 (D) (1) and 196, NIRC; Sec. 185, RR No. 26 A.L. De Castro Const. and Land Dev't. Corp. No. 7 Escarlata St., Brgy. Culiat Tandang Sora Quezon City Attention: Ernesto S. De Castro President Gentlemen : This refers to your letters dated October 4 and November 9, 2006 where you requested this Office to issue a ruling on the tax exemption of a reconveyed property due to the failure to secure a loan to purchase said property. It is represented that a parcel of land in Tanay, Rizal covered by TCT No. M-30075 and owned by A.L. de Castro Land Development Corporation ( "A.L. de Castro" for brevity) was made part of a low cost housing project funded by the National Home Mortgage and Finance Corporation (NHMFC). On October 20, 1988 Salvacion and Floro Martinez (Martinez Spouses) executed a Loan and Mortgage Agreement with A.L. de Castro wherein it was agreed that A.L. de Castro would loan the Martinez Spouses One Hundred and Thirty Two Thousand Pesos (P132,000.00), to be repaid in monthly installments over a period of 300 months, to purchase said property from the former in exchange for a mortgage over said property to be executed in favor of A.L. de Castro. A.L. de Castro then sold the property to the Martinez Spouses on November 14, 1988 through a Deed of Absolute Sale and had title over the property transferred to the Spouses on December 1, 1988. Unfortunately, despite submitting all the requirements and paying a reservation fee, the spouses' loan apparently did not materialize as Mr. Martinez's employer, Flaming Hot Incorporated (FHI), refused to deduct the needed monthly amortization from his salary. Due to this, A.L. de Castro nullified the Loan and Mortgage Agreement with the Martinez Spouses and the latter executed a Deed of Reconveyance to return the abovementioned property back to A.L. de Castro. You now request this Office to confirm your opinion that the reconveyance of the abovementioned property from the Martinez Spouses back to A.L. de Castro is not subject to withholding tax and DST, considering that the loan that was supposed to pay for the property did not materialize. In reply, please be informed that this Office in an earlier ruling, (BIR Ruling DA-072-2000, dated February 2, 2000) held that a sale transaction made prior to the release of the buyers' loans from the NHMFC is regarded as without consideration and produces no effect whatsoever, pursuant to Art. 1352 of the Civil Code.Hence, a Deed of Reconveyance without consideration executed by the withdrawing buyers in the seller's favor so as to effect the return of the house and lot they bought from the latter, is not subject to the capital gains tax and to the documentary stamp tax as conveyances without consideration are not taxable. (BIR Ruling No. DA-015-97 dated January 14, 1997) The above ruling is applicable to the case at hand. As the loan application by the Martinez Spouses did not materialize, there is no consideration on their purchase of the abovementioned property from A.L. de Castro. And as there is no valid purchase of the property to speak of for such lack of consideration, if follows that the revonveyance by the Martinez Spouses of the property back to A.L. de Castro in not subject to the capital gains tax imposed under Section 24 (D) (1) of the Tax Code of 1997 and to the documentary stamp tax prescribed under Section 196 of the Tax Code of 1997, as amended by RA 9243. AHSEaD However, the payment of the reservation fee by the Martinez Spouses for the purchase of the property is subject to the creditable withholding tax imposed under Section 57 (B) of the Tax Code of 1997 and implemented by Revenue Regulations No. 2-98, and consequently to income tax imposed under Sec. 27 (A) of the Tax Code of 1997. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service