BIR Ruling [DA-098-03]

March 28, 2003 BIR RULING [DA-098-03] DA 013-00 M. De Leon, Inc. No. 6 Saint Peter Street Cubao, Quezon City Attention: Mr. Manuel P. De Leon, Jr. VP & Gen. Manager Gentlemen : This refers to your letter dated February 18, 2003 stating that on September 30, 1993, a Deed of Exchange was executed by Manuel De Leon in favor of M. De Leon, Inc., whereby the former transferred to the latter six (6) parcels of land together with the improvements thereon located at Kaunlaran, Cubao, Quezon City covered by TCT Nos. 327157, 265622, 265623, 302661, 66540 and 66542 all issued by the Registry of Deeds for Quezon City with an aggregate area of 9,572 square meters in exchange for 65,000 shares of stock or with an aggregate par value of P6,500,000.00; that pursuant to said transaction, the Bureau of Internal Revenue (BIR) issued BIR Ruling No. 534-93 dated December 28, 1993, exempting Manuel De Leon from the payment of capital gains tax under Section 34(c)(2) and (6)(c) of the Tax Code, as amended; that on January 30, 2003, at the Special Meeting of the Board of Directors of M. De Leon, Inc., it was unanimously approved that the parties agreed to reconvey to each other by way of Deed of Reconveyance the properties which they have previously exchanged with each other, since the transferee corporation, M. De Leon, Inc., has failed to develop and improve the said properties for lack of funds; that on February 20, 2003, a Deed of Reconveyance was executed by M. De Leon., Inc. and Manuel De Leon, after the rescission of the Deed of Exchange on February 6, 2003, whereby the former agreed to reconvey the properties now covered by TCT Nos. 105928, 105927, 105925, 105930, 105923 and 105924 to Manuel De Leon and the latter agreed to reconvey the 65,000 shares of stock to M. De Leon, Inc. In connection therewith, you now request a ruling that the rescission of the Deed of Exchange in a tax-free transaction is not subject to capital gains tax and documentary stamp tax. In reply thereto, please be informed that rescission of a contract does not give rise to a taxable event for two reasons: (a) the result of rescission is that it is as if there was no sale, transfer or exchange, and hence, no income is realized; and (b) the return of the object of the rescinded contract is not for monetary consideration and is merely an acknowledgment or confirmation of the title and ownership of the original owner of the property. Thus, the surrender of the 65,000 shares of stock of M. De Leon, Inc. for the cancellation of the shares and the subsequent return of the six (6) parcels of land to Manuel De Leon is a necessary consequence of a rescission of the contract. IN BIR Ruling No. 059-92 dated February 18, 1992, citing Article 1191 of the Civil Code on contract rescission, it was ruled that no gain shall be recognized on the return of the real property upon the rescission of a deed of absolute sale resorted to by the buyer due to the seller's non-compliance with his obligation to deliver the realty sold. It was likewise ruled that the deed of rescission shall not be subject to the documentary stamp tax, but to the P15.00 documentary stamp tax under Section 188 of the Tax Code of 1997. Accordingly, the reversion of the 65,000 shares of stock to M. De Leon, Inc. by Manuel De Leon and the subsequent return of the aforesaid properties to the latter is not taxable since it is a mere reconveyance of the object of the rescinded contract and is not for monetary consideration. Besides, Section 73 of the Tax Code of 1997 provides that only distributions made by a corporation to its shareholders out of its earnings or profits, whether in money or property are taxable. ( A. Soriano Corporation vs. Commissioner of Internal Revenue, CTA Case No. 3710, July 4, 1991, affirmed in Commissioner vs. A. Soriano Corporation and CTA, CA-G.R. SP No. 26017, January 15, 1993; Commissioner vs. Brown, CA (7) 69 Fd. 602 ) Under the aforesaid contract between M. De Leon, Inc. and Manuel De Leon, no corporate earnings or profits will be distributed by M. De Leon, Inc. THEREFORE, neither M. De Leon, Inc. and Manuel De Leon will realize any taxable gain from the cancellation of the shares of stock and the return of the properties. Both will not receive any net beneficial income nor any realized income which is required by the Tax Code for redemption of shares to be a taxable event. 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. HICSTa Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service