BIR Ruling [DA-095-01]

May 22, 2001 BIR RULING [DA-095-01] 329-92; 24 Vicente E. Reyes and Associates 22 Tirad Pass Quezon City Attention: Amado P . Galang Partner Gentlemen : This refers to your letter dated April 25, 2001 requesting for confirmation of your opinion that no realized income is recognized from involuntary conversion of the real property of Basa-Guidote Enterprises, Inc. (BGEI), hence, no capital gains tax may be levied on the excess of just compensation paid by the City of Manila over the net book value of the property expropriated. It is represented that the BGEI is a corporation organized and existing under the laws of the Philippines, the primary purpose of which is to engage in the purchase, lease, management, improvement, sale of any real estate structures thereon; that the BGEI owns, among others, a real property with TCT No. 76220, subdivided into lots 1-A-2 and 1-A-3, situated at J. Figueras Street, Sampaloc, Manila; that the improvements erected thereon were razed by fire in 1997; that due to financial incapacity of the BGEI to rehabilitate said property, it remains uninhabited, idle and obviously has not been earning income since then; that on January 21, 2000, the City of Manila issued Ordinance No. 7975, expropriating Lot 1-A-2 of the said property as a relocation site for the public market stall holders displaced by the construction of the MRT2 Project; that notwithstanding the vigorous opposition of the BGEI against the condemnation, the City of Manila pursued the expropriation proceedings; that the said lot is now the subject of involuntary conversion; that in view of the inevitable expropriation of Lot 1-A-2, the BGEI intends to establish a replacement fund for the acquisition of a similar property out of the proceeds of the involuntary sale to the City of Manila; and that the said replacement fund shall be established as soon as the BGEI settles an on-going dispute with the Securities and Exchange Commission and the Board of Directors and officers of the BGEI shall have been elected and organized. cSEaDA In reply, please be informed that in BIR Ruling No. 329-92, dated November 18, 1992, this Office ruled that no realized income may be recognized from the compulsory or involuntary conversion of a property. In the same ruling the definition of the term "involuntary conversion" was laid down as follows: "Involuntary conversion if property (as a result of its destruction, in whole or in part, theft, or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar to the property so converted, or into money which is forthwith in good faith . . . expended in the acquisition of other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain shall be recognized, but in an amount not in excess of the money so expended." Accordingly, we hereby confirm your opinion that no realized income is recognized from the involuntary conversion of the said real property of BGEI, hence, no capital gains tax may be levied on the excess of just compensation paid by the City of Manila over the net book value of the property expropriated. However, the proceeds from the expropriation of the property should be reflected as a separate item (replacement fund) in the audited financial statements. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group