Winthrop Realty & Development Corp.

February 15, 2007 BIR RULING [DA-098-07] 24 (D) (5); UN-028-1994; DA-172-2003 Winthrop Realty & Development Corp. Penthouse Taipan Place, F. Ortigas Jr. Road, Ortigas Center Pasig City Attention: Ms. Marilyn S. Bautista Treasury Manager Gentlemen : This refers to your letter dated January 30, 2007 requesting for confirmation of your opinion that the tax base in computing the capital gains tax (CGT) due on the Deed of Conditional Sale of Real Estate executed by and between Celia R. Poblete, et al. and Winthrop Realty & Development Corp. ("Winthrop"), relating to a parcel of land situated at Barangay Bangcal, Carmona, Cavite in 1992, is the value of the property at the time of the execution of the Deed of Conditional Sale. It is represented that in 1992, Celia R. Poblete, et al., as sellers, executed a Deed of Conditional Sale of Real Estate with Winthrop Realty & Development Corp., as buyer; that Winthrop purchased a 6.2 hectare unregistered parcel of land from the sellers, covered by Tax Declaration No. 4627 situated in Barangay Bangcal, Carmona, Cavite; that Winthrop initially made a payment representing the 15% of the total contract price pending the registration of title under the name of Celia R. Poblete, et al.; that however, there was a third party claimant and the said realty became the subject of litigation from 1994 until the finality of the decision from the Supreme Court in 2006; and that Winthrop was able to fully pay the sellers only on July 12, 2006, the date when the Deed of Absolute Sale was executed between the parties. In reply, please be informed that for sales of real property classified as capital asset and qualified as installment sales for capital gains tax purposes, (where the sum of the down payment and installments received in the year of sale do not exceed 25% of the contract price) the tax base for the computation of CGT should be the zonal value at the time of the execution of the Contract to Sell or Deed of Conditional Sale and not the zonal value at the time of the execution of the Deed of Absolute Sale. SDHAcI The basic distinction between a sale of real property on the installment plan and a sale on a deferred-payment basis, not on the installment plan, lies on the amount of "initial payments" received by the seller. The sale is on the installment plan if the initial payments in the year of sale do not exceed twenty-five percent (25%) of the selling price. If the initial payments in the year of sale exceed twenty-five percent (25%) of the selling price, then the sale is on deferred-payment basis, not on the installment plan. ( Sec. 175, Revenue Regulations No. 2 ) The term "initial payments" is defined to mean payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale or other disposition is made. This term must not be equated with what is commonly called "downpayment" because its meaning is much broader than that. While it covers any downpayment made, it goes further and includes all payments actually or constructively received during the year of sale. ( Gertrude H. Sweet, 8 BTA 404; Cortland Specialty Co. 22 BTA 808 ) and the aggregate of all such payments determines whether or not the limit which the law has set has been exceeded. Such being the case, and since as represented, the initial payment made by Winthrop in the year of sale is only 15% of the selling price of the parcel of land, the sale shall be considered as sale on the installment plan. Thus, your opinion to the effect that for sales qualifying as installment sales for capital gains tax purposes (where the sum of the downpayment and installments received in the year of sale does not exceed 25% of the contract price) the tax base for the computation of CGT should be the zonal value at the time of the execution of the Deed of Conditional Sale of Real Estate and not the zonal value at the time of execution of the Deed of Absolute Sale is hereby confirmed. ( BIR Ruling Nos. UN-028-1994 dated January 28, 1994 and DA-172-2003 dated June 2, 2003 ) 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. ECDaAc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service