BIR Ruling [DA-105-00]

February 15, 2000 BIR RULING [DA-105-00] Multi-Realty Development Corporation Rm. 426, Makati Stock Exchange Bldg. Ayala Avenue, Makati City Attention: Ms . Cecilia R . Patricio AVP, Tax Division Gentlemen : This refers to your letter dated June 1, 1998 requesting for a confirmation of your opinion to the effect that the reconveyance of realty without valuable consideration in favor of the previous owner thereof as a result of the loss of interest of the buyer to pursue the sale transaction is not subject to the capital gains tax and/or creditable withholding tax and documentary stamp tax. llcd It is represented that Multi-Realty Development Corporation (MRDC) is a domestic corporation engaged in the realty business; that it is the owner and developer of SM Homes located at Camarin Road, Novaliches, Quezon City and has offered to sell commercial/residential townhouses units thereat; that on March 12, 1997 it executed with the Spouses Gavino M. Tan and Carmelita Tan, a Buyer's Agreement involving a certain parcel of land improved with a Townhouse Unit located at Lot No. 28, Block No. 1 of SM Homes for a purchase price of P1,650,000.00; that the said Spouses Tan completed the downpayment equivalent to 20% of the purchase price; that the balance to be paid out of the proceeds of a loan to be applied with Banco de Oro Commercial Bank (BDO) and with the property serving as collateral to the said loan; that the Spouses Tan acknowledge that this is a deferred cash transaction and not an installment sale within the meaning of R. A. No. 6552 and expressly waive the provisions of said law, that to facilitate the approval of the loan, MRDC agreed to execute a Deed of Absolute Sale for the transfer of the property from MRDC to the Spouses Tan with the understanding that the proceeds of the Spouse's Tan, loan will be given directly by BDO to MRDC as full payment for the balance of the purchase price of the property; that in behalf of the Spouses Tan, MRDC paid the creditable withholding tax of P49, 500.00 to the BIR on March 12, 1997 and registered the Deed of Absolute Sale between the parties with the Register of Deeds in Kalookan City; that consequently on April 3, 1997 Title to the property in the name of MRDC was cancelled, and in lieu thereof, TCT No. 318579 was issued in the name of the Spouses Gavino Tan and Carmelita Tan; that after the annotation of the Spouse's Tan mortgage over the property in favor of BDO, the Spouses Tan were advised that their loan was already available for release subject to the opening of a bank account with BDO; that however, on August 4, 1997 the Spouses Tan advised MRDC that they are no longer interested in pursuing the purchase of the property and manifested their intention to return the property to MRDC; that MRDC agreed and accepted the return and reconveyed the property subject to the following terms and conditions: 1. Spouses Tan shall execute and deliver to MRDC all documents that may be necessary for the transfer of the property free and clear from any and all liens and encumbrances including the mortgage annotation in favor of BDO by the Spouses Tan on the title of the property. 2. Spouses Tan should shoulder all expenses that MRDC shall incur in the transfer of title of the property to MRDC and such other expenses MRDC may further incur in the return and reconveyance of the property to MRDC including the expenses for the cancellation of mortgage annotated in favor of BDO by the Spouses Tan on the Title of Property. and that in view of the above and since the Deed of Reconveyance was executed merely to transfer the title back to its original owner, MRDC, and since no monetary or valuable consideration is involved in said reconveyance, you are of the opinion that the subject transaction is exempted from the payment of capital gains tax, expanded creditable withholding tax and documentary stamp tax. prcd In reply, please be informed that Section 24 (D)(1) of the Tax Code of 1997 provides, viz: "(D) Capital gains tax from sale of Real Property . "(1) In General . The provisions of Section 39(B) notwithstanding a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporation shall be determined either under Section 24(A) or under this Subsection at the option of the taxpayer;" From the foregoing, it is clear that the above provisions of the Tax Code does not apply to the reconveyance by the Spouses Tan of the property in question to its previous owner, MRDC, since the said reconveyance was done due to the loss of interest of the buyer to pursue the sale transaction and with the end view of transferring the title of the said property back to its original owner without monetary or valuable consideration and, therefore, not subject to the capital gains tax imposed under the provisions of Section 24(D)(1) of the Tax Code of 1997. The same is likewise true in the case of the expanded creditable withholding tax prescribed under Section 2.57.1(J) of Revenue Regulations No. 2-98 implementing Section 57(B) of the Tax Code of 1997 (BIR Ruling No. DA-015-97 dated January 14, 1997. However, all payments made by the Spouses Gavino M. Tan and Carmelita Tan in favor of MRDC as a consequence of the said sale transaction which was not returned to the said Spouses by MRDC is subject to the creditable withholding tax prescribed under Section 57(B) of the Tax Code of 1997 and whatever income which will be derived by Spouses Gavino M. Tan and Carmelita Tan by virtue of the said reconveyance shall be subject to income tax. Moreover, the said sale transaction is not also subject to the documentary stamp tax prescribed under Section 196 of the Tax Code of 1997, since under Revenue Regulations No. 26 otherwise known as the Revised Documentary Stamp Tax regulations , conveyances of realty without valuable consideration is not subject to the documentary stamp tax. (BIR Ruling No. DA-015-97 dated January 14, 1997) However, the acknowledgment on said Deed of Reconveyance is subject to a documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. Finally, the valid but later on cancelled Deed of Absolute Sale executed by MRDC in favor of the Spouses Gavino M. Tan and Carmelita Tan which was subjected to the documentary stamp tax imposed under Section 196 of the Tax code of 1997 is not refundable for lack of legal basis. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group