BIR Ruling [DA-094-02]

May 22, 2002 BIR RULING [DA-094-02] RR 1-90 Atty. Emmanuel N. Camitan 10th Floor, PLDT Tower I Ayala Avenue, Makati City S i r : This refers to your letter dated January 16, 2002 requesting on behalf of your clients, Spouses Ricardo R. Zarate and Elizabeth M. Zarate, for legal opinion on the following queries: 1. Is the transfer by virtue of the order of the court subject to capital gains tax, transfer tax and documentary stamp tax? If in the affirmative, are Spouses Zarate obliged to comply with the requirements of RMO No. 53-98 (capital gains verification checklist)? If in the negative, what should Spouses Zarate do to expedite the registration of subject properties? 2. Are Spouses Zarate required to pay penalties or surcharges for their failure to register the sale of lot (covered by TCT No. 226539) though not of their own fault but because of the unjust refusal of Kalfam Enterprises, Inc. to deliver the owner's copy of the TCT? The facts of the case as culled from the documents submitted are as follows: A. Lot 5, Block 2, PSD 140377 covered by TCT No. 226539 On May 27, 1994, a Deed of Absolute Sale was executed by Kalfam Enterprises, Inc. in favor of Spouses Zarate over a parcel of land covered by TCT No. 226539 of the Registry of Deeds of Quezon City, particularly described as follows: "A parcel of land (Lot 5, Block 2, of the subdivision plan (LRC) Psd-140377, being a portion of Lot 2, (LRC) Psd-140262, LRC Rec. No. 5975), situated in the District of Tandang Sora, Quezon City, Island of Luzon. Bounded on the NE., points 5 to 1 by Lot 6, Block 2; on the SE., points 1 to 2 by Road Lot 1; on the SW., points 2 to 3 by Lot 4, Block 2, all of the subdivision plan; and on the NW., points 3 to 4 by Lot 4, Block 8, (LRC) Psd-14350; and on the NE., points by Lot 6, Block 10, (LRC) Psd-14350. (Doa Faustina Village) Beginning at point marked "I" on plan being N. 77 deg. 22'E., 627.14 m. from L.M. 16, Piedad Estate; thence S. 52 deg. 44'W., 14.00m to point 2; thence N. 37 deg. 15'W., 58.66m. to point 3; thence N. 20 deg. 08'E., 4.04m. to point 4; thence S. 79 deg. 56'E., 15.61 m. to point 5; thence S. 37 deg. 16'E., 49.34m. to point of beginning; containing an area of SEVEN HUNDRED EIGHTY SEVEN (787) SQUARE METERS, more or less. . . ." On May 30, 1994 and June 8, 1994, Spouses Zarate paid the documentary stamp tax (DST) in the amount of P31,875.00 and withholding tax in the amount of P53,122.50, respectively. Subsequently, a Certificate Authorizing Registration (CAR) covering the aforesaid property was issued in favor of the spouses on June 8, 1994. On February 29, 1996, Spouses Zarate, through their real estate broker, Gloria Noel, demanded the release of TCT No. 226539 for purposes of registration with the Register of Deeds of Quezon City of the deed of sale and transfer of title in the name of Spouses Zarate. Despite receipt of the demand letter, Kalfam Enterprises, Inc. refused to release and deliver the owner's copy of TCT No. 226539. B.a) Lot 22 Block 5 PSD 169023 covered by TCT No. 254293 b) Lot 23 Block 5 PSD 169023 covered by TCT No. 254294 On December 5, 1978 Kalfam Enterprises, Inc. executed in favor of Spouses Lip Chua and May Chua an agreement denominated as contract nos. 371 and 370 wherein the former sold, on installment basis, to the latter the subject lost covered by TCT Nos. 254293 and 254294, respectively, both situated in Tierra Pura Subdivision, Quezon City and consisting of 512 square meters each. On March 14, 1989, Spouses Chua transferred to Spouses Zarate, by way of Transfer of Rights Agreement, their rights as purchasers over the subject lots with the approval of Kalfam Enterprises, Inc. On January 3, 1994, Kalfam Enterprises, Inc., represented by its President, Ma. Eva E. Kalaw, wrote a demand letter to Elizabeth Zarate demanding from the latter the outstanding balance for the above two lots. In a letter dated November 23, 1994, Elizabeth Zarate, however, reiterated her demand from Trinidad Y. Kalaw, the General Manager of Kalfam Enterprises, Inc. made on June 17, 1994, for reimbursement of the creditable withholding tax it paid on the sale of the property covered by TCT No. 226539 and the release of the Owner's Copy thereof. On February 29, 1996, Spouses Zarate, through their broker, Gloria Noel, informed Kalfam Enterprises, Inc. of their intention to settle their unpaid installments by deducting the same on the amount they paid on the creditable withholding tax, with the balance to be reimbursed to the said spouses. Despite repeated demands, Kalfam Enterprises, Inc. did not answer the above manifestation and refused to deliver the owner's copies of the TCTs and to execute the corresponding Deeds of Sale for parcels of land covered by TCT No. 254293 and 254294. C. Litigation/Resolution Resolution from the unjust refusal by Kalfam Enterprises, Inc. to execute the two (2) deeds of sale covered by TCT No. 254293 and 254294 and to deliver the owners' copies of the three (3) TCTs, Spouses Zarate filed with the Regional Trial Court of Quezon City a suit for Specific Performance with damages, designated as Civil Case No. 0-96-28675, to compel Kalfam Enterprises, Inc. to execute the corresponding deeds of sale for lots covered by TCT No. 254293 and 254294 and to compel the delivery of the owners' copies of TCT No. 254293, 254294 and 226539. After trial on the merits, the RTC of Quezon City decided in favor of your clients, Spouses Zarate, the dispositive portion of which reads as follows: "Wherefore, premises considered, Judgment is hereby rendered ordering the defendants: 1) To release and deliver the owners copy of TCT Nos. 226539, 254293 and 254294 of the Registry of Deeds of Quezon City to the plaintiffs Spouses Ricardo R. Zarate and Elizabeth M. Zarate; 2) To execute in favor of the plaintiffs the Deed of Absolute Sale covering TCT Nos. 254293 and 254294 of the Registry of Deeds of Quezon City; . . . So Ordered. Quezon City, Philippines, September 29, 1997." Moreover, it is embodied in the decision rendered by the RTC of Quezon City that the unpaid balance of the spouses in TCT Nos. 254293 and 254294 were settled already, as an agreement was made thereon, that the same will be deducted from the creditable withholding tax advanced by the spouses for and in behalf of the seller, Kalfam Enterprises, Inc. On February 18, 1998, upon motion of the plaintiffs, the RTC of Quezon City, Branch 220, issued a Writ of Execution. Despite receipt by Kalfam Enterprises, Inc. of the writ of execution issued by the RTC, it still refused without justifiable reason to deliver the owners' copy of the subject TCTs and to execute the corresponding deeds of sale. This compelled Spouses Zarate to petition the court to compel Kalfam Enterprises, Inc. to comply with the order of the RTC, which petition was granted by the court in its Order dated November 4, 1998, the dispositive portion of which reads as follows: "Wherefore, in the light of the foregoing, defendant Kalfam Enterprises, Inc. is hereby divested of its ownership and title over Transfer Certificate of Title Nos. 226539, 254293 and 254294 of the Registry of [sic] Registry of Deeds of Quezon City and vests ownership over said titles to plaintiffs Spouses Ricardo R. Zarate and Elizabeth M. Zarate, which shall have the force and effect of a conveyance executed in due form of law. Subsequently, Transfer Certificate of Title Nos. 226539, 254293 and 254294 of the Registry of the [sic] Registry of Deeds of Quezon City are hereby annulled. The Register of Deeds of Quezon City is hereby ordered to issue new certificates of title, [sic] in lieu thereof, in the name of plaintiffs Spouses Ricardo R. Zarate and Elizabeth M. Zarate. Such new certificates and all duplicates thereof shall contain a memorandum of the annulment of the outstanding duplicate. SO ORDERED. Quezon City, Philippines, November 4, 1998." The said Order dated November 4, 1998 has been entered as final per the order of the RTC dated January 6, 1999. Plaintiffs, through counsel, presented the decision and orders of the RTC with the Register of Deeds of Quezon City for purposes of transferring the titles to Spouses Zarate but was advised to pay capital gains tax and other taxes before registration of the decision of the RTC could be effected. In reply, please be informed that sale, exchange or transfer of real property, other than capital assets, by an individual, estate, trust, trust fund or pension fund or real property, whether capital or ordinary asset, by a corporation who is habitually engaged in real estate business is subject to the creditable withholding tax prescribed under Revenue Regulations No. 1-90, as amended by Revenue Regulations No. 12-94, implementing Section 50(b) of the Tax Code, as amended. Accordingly, the transfer of Transfer Certificate of Title Nos. 254293 and 254294 of the Registry of Deeds of Quezon City by Kalfam Enterprises, Inc. a domestic payee-corporation who is habitually engaged in real estate business, in favor of Spouses Zarate is subject to the 2.5% creditable withholding tax prescribed under Section 1(j)(ii) of Revenue Regulations No. 1-90. Under Revenue Memorandum Circular No. 7-90, clarifying Revenue Regulations Nos. 12-89 and 1-90 prescribing the withholding of creditable income tax on the sale, exchange or transfer of real property, the obligation of the payor to deduct and withhold arises at the time the consideration is paid or payable (par. 4, RMC 7-90). However, where the consideration or part thereof is payable on installments no withholding of tax is required to be made on the installment payments where the buyer from individual not engaged in any trade or business. In such a case, the withholding of tax shall be made on the last installment paid to the seller. Such being the case and since in the instant case the last installment payments for the lots covered by Transfer Certificate of Title Nos. 254293 and 254294 of the Registry of Deeds of Quezon City were made approximately in February of 1994 (no date was mentioned in the decision/judgment rendered in Civil Case No. Q-96-28675 dated October 2, 1997), Spouses Zarate, therefore, should have made the withholding or deduction of taxes on the same date, regardless of the execution of the deed of sale and the delivery of the titles covering the aforementioned properties. Moreover, due to the failure of Spouses Zarate to withhold the 2.5% withholding tax prescribed under Revenue Regulations No. 1-90, they, as the withholding agents of the Government, shall be liable to pay, in addition to the tax required to be deducted and withheld, a surcharge of twenty-five percent (25%) of said tax, plus interest at the rate of twenty percent (20%) per annum from the date prescribed for payment until the amount is fully paid pursuant to Sections 248 and 249 of the 1977 Tax Code, as amended, the law applicable at the time the last installment payments were made by the spouses. The Certificate Authorizing Registration (CAR) shall be issued only upon presentation of the Confirmation Receipt or official receipt evidencing payment of the creditable withholding tax, the corresponding surcharge and interest due on the transfer of Transfer Certificate of Title Nos. 254293 and 254294 of the Registry of Deeds of Quezon City in favor of Spouses Zarate. For this purpose, it is required that the necessary information regarding such payment of withholding tax and the corresponding surcharge and interest should be typed and reflected on the face of the certificate to be issued by the internal revenue officer concerned. ( No. 7 of RMC No. 7-90 ) The requirements set forth under Revenue Memorandum Order No. 53-98, among which is the submission of the Deed of Absolute Sale and the corresponding Transfer Certificates of Title, need not be complied with. The presentation of the Confirmation Receipt or official receipt evidencing payment of the creditable withholding tax, the corresponding Contracts to Sell covering the above-mentioned properties; and, the Court Order vesting the ownership of the same to the spouses are sufficient to cause the issuance of the CAR. Finally, on your query on whether Spouses Zarate shall be required to pay penalties or surcharges for their continued failure to register the sale of lot covered by TCT No. 226539, it is deemed proper by this Office that the foregoing should be addressed to the proper Registry of Deeds as the same is within their jurisdiction. 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