BIR Ruling [DA-136-97]

March 31, 1997 BIR RULING [DA-136-97] Atty. Benjamin D. Sales & Associates No. 5 July Street Extension Turo Hills, Quezon City Attention: Atty . Benjamin D . Sales Gentlemen : This refers to your letter dated June 25, 1996 requesting in behalf of your clients, Mr. & Mrs. Rogelio Diaz, Mr. & Mrs. Cesario Floria and Mr. & Mrs. Tiongco, for a ruling exempting your said clients from the payment of capital gains tax and documentary stamp tax on the exportation by the government represented by the Department of Public Works and Highways (DPWH) of their respective real properties. cdll It is represented that the real properties of your aforesaid clients situated at JEM 7 Subdivision, Talipapa, Novaliches, Quezon City, were expropriated by the Government thru the DPWH to give way for the extension of Mindanao Avenue, Quezon City; that before final payment is made on your clients' realties, the DPWH would like to impose (withhold) the capital gains tax due on the said involuntary sale of your clients' realties; and that you are of the opinion that the imposition of the capital gains tax on the said involuntary sale would constitute confiscation of your clients' properties, since the value (consideration) of the sale is not of your clients' liking, but subject to the dictates of what the government believes to be the fair market value of said real properties. In reply, please be informed that under Section 21 (e) of the Tax Code as amended, 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, shall be taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. Provided, that the tax liability, if any, on gains from sales or other disposition of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 21(a) or under Section 21(e) both of the Tax Code, as amended, at the option of the taxpayer. llcd The foregoing provisions of Section 21(e) of the Tax Code, as amended is broad enough to include sale by individuals of their real property through expropriation proceedings. Accordingly, this Office is of the opinion as it hereby holds that the sale in favor of the government represented by DPWH of the aforementioned real properties of your clients situated at JEM 7 Subdivision, Talipapa, Novaliches, Quezon City through expropriation proceedings is subject to the capital gains tax imposed under Section 21(e) of the Tax Code, as amended, and to the documentary stamp tax prescribed under Section 196 of the Tax Code, as amended (BIR Ruling No. 091-89 dated May 2, 1989) based on the "just compensation" of the said properties as the actual consideration of the aforesaid sale by your clients of the same. (Revenue Memorandum Order No. 41-91). However, the tax liability of your said clients from such sale in favor of the government represented by the DPWH shall be determined either under Section 21(a) or (e) of the Tax Code, at their option. In case they elect the former, this Office shall issue the Certificate authorizing the transfer of title to the purchaser (now Certificate Authorizing Registration). [Section 7(a)(5), Revenue Regulations No. 8-79]. On the other hand, in case they elect the latter, this Office hereby allows the registration of the Deed of Sale with the Register of Deeds concerned and consequently, the transfer of title to the property in favor of the government. Thereafter, upon submission of a new Certificate of Title in the name of the government, at which time payment of the property can be effected, your said clients shall file the corresponding capital gains tax return within thirty (30) days from said submission of the Certificate of Title. The DPWH shall within the same period, in turn, withheld the capital gains tax due from your said clients and remit the same to the Bureau of Internal Revenue. In this connection, it may be noted that this ruling applies only to sales of property in favor of the government wherein the contract stipulates that the seller shall not be paid until title to the property is transferred to the government, or such transfer of title in favor of the government as a condition required by government-regulations before payment could be processed and effected to the seller. (BIR Ruling No. 171-91 dated September 4, 1991) aisadc Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)