BIR Ruling [DA-183-03]

June 10, 2003 BIR RULING [DA-183-03] 24 (D) (1), 196; DA-181-2002 Ayala Land, Inc . Tower One, Ayala Triangle Ayala Avenue, Makati City Attention: Atty. Ma. Angeli L. Ferrer Department Manager-Legal Division Gentlemen : This refers to your letter dated January 13, 2002 requesting for a confirmation of your opinion that the Deed of Rescission and Reconveyance to be executed by Spouses Enrique Natalio Castillo Zalamea and Cecille Anne Zalamea (Zalamea Spouses) reconveying a parcel of land to Ayala Land, Inc. (ALI for brevity) is not subject to capital gains tax under Section 24(D)(1) of the Tax Code of 1997 and documentary stamp tax under Section 196 of the same Code. It appears that ALI, a corporation duly organized and existing under Philippine laws, is engaged in the business of real estate development; that in 1998, ALI began the development of a residential subdivision located in Silang, Cavite known as Ayala Westgrove Heights (the "Project"), and started selling to the public subdivision lots therein based on an overall development plan (the "Master Plan") of the Project; that the aforestated Master Plan illustrates, among others, the location plan for specific salable lots, roads, amenities, and common areas once the Project is fully developed; that in December 30, 1998, the Zalamea Spouses, relying on the Master Plan of ALI for the Project, entered into an Agreement to Purchase and Sell for the purchase of a subdivision lot identified as Lot No. 45, Block I, with an area of 456 square meters, and covered by Transfer Certificate of Title No. T-813617 (Lot 45); that after completing the installment payments in the aggregate amount of P3,306,000.00, a Deed of Absolute Sale was executed by ALI and the Zalamea Spouses on March 24, 1999; that the creditable withholding tax, value-added tax, and documentary stamp tax accruing on the transaction were all paid and remitted to the Bureau of Internal Revenue, and for this reason, the above-mentioned transfer certificate of title was subsequently registered in the names of the Zalamea Spouses; that sometime in October 2002, however, ALI discovered in the course of its performance of land development works in the Project that a substantial portion of the subdivision lot bought by the Zalamea Spouses was actually non-buildable; that this arose due to an inaccuracy in the topographic map which was used as basis for the Master Plan; that in view of this error, the Zalamea Spouses manifested their intention to rescind their purchase of Lot 45; that ALI, being a responsible real estate developer, offered to substitute Lot 45 with another lot in another area of the Project and absorb the costs incident to such substitution; and that in order to effect the substitution, ALI and the Zalamea Spouses will first have to execute a Deed of Rescission and Reconveyance that will convey back to ALI without monetary consideration Lot 45. In reply, please be informed that in the instant case, there is no actual sale, exchange or voluntary disposition of real properties, but a mere reconveyance of the buyers subdivision lots which were erroneously sold to them, inasmuch as the significant portion of the property purchased by the Zalamea Spouses was actually non-buildable. Considering that the transfer was made merely for the purpose of replacing or substituting the property and will not result in any way to an increase in wealth or income on either parties, since ALI offered to substitute Lot 45 with another lot in another area of the Project and absorb the costs incident to such substitution, the reconveyance therefore to ALI of the property in question by the Zalamea Spouses are not subject to the capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997. Finally, the said Deed of Rescission and Reconveyance executed for the purpose is not likewise subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code. However, the notarial acknowledgment to said deed is subject to the documentary stamp tax of P15.00 under Section 188 of the same Tax Code. ( BIR Ruling No. DA-181-2002 dated October 10, 2002 ) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. IcDESA Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service