BIR Ruling [DA-198-03]

June 24, 2003 BIR RULING [DA-198-03] 27 (D) (5); 068-00 Del Rosario & Del Rosario 15/F Pacific Star Building Makati Avenue corner Sen. Gil Puyat Avenue Makati City Attention: Atty. Ma. Jenny Arevalo De Villa Gentlemen : This refers to your letter dated May 26, 2003 stating that your client, Superintendent of the Norwegian Missionary Alliance is a religious organization existing in the Philippines for at least twenty-five (25) years, doing missionary and charitable work for the poor families and Filipino youths; that it is organized as a corporation and duly registered with the Securities and Exchange Commission (SEC); that its main organization is the Den Norske Misjonsaliianse based in Oslo, Norway; that both organizations are engaged in religious, missionary and charitable activities; that as a corporation sole, Superintendent of the Norwegian Missionary Alliance has legally acquired several properties used solely and exclusively for the propagation of its mission in the Philippines; that the mission in the Philippines is under the administration of a Superintendent; that in 2002, the previous Superintendent in the Philippines at that time, Mr. Trygve Bjorkas was informed by the mother organization of his impending retirement and replacement by a new Superintendent; that however, before the new Superintendent was able to hold office and take over the administration of the Philippine mission, the previous Superintendent transferred, through deeds of donation, all properties used as mission centers in the Philippines; that the transfers of the properties were made effective in a span of only a few months; that when the properties were transferred, the organization was deprived of all its properties and mission centers; that not a single property remained in the name of the local mission; that the recipient and donee of the properties was Shalom Learning Center, Inc.; that the recipient is composed of social workers of the Philippine mission under the previous Superintendent; that when the deeds of donation were executed, the titles to the properties under the name of Superintendent of the Norwegian Missionary Alliance were cancelled and new titles were issued in the name of Shalom Learning Center, Inc., that the mother organization in Norway discovered the transfer of the properties only when the new and current Superintendent assumed office; that the acts of the previous Superintendent in transferring the properties were never sanctioned; that upon discovery that it has been deprived of all its mission centers and properties in the Philippines, the Superintendent of the Norwegian Missionary Alliance, through its lawyers filed adverse claims on all properties to protect its rights as the just and rightful owner; that seeing the determination of the current Superintendent of the local mission to recover the properties, the recipient, Shalom Learning Center, Inc. agreed to an amicable settlement of properties; that the amicable settlement of properties was included in the Deed of Reconveyance and Amicable Settlement of Properties executed by both parties for each and every property transferred on April 29, 2003 and May 15, 2003; that the chairman of the Board of Trustees of the Shalom Learning Center, Inc. signed the Deed of Reconveyance in behalf of the current registered owner and transferor, authorized by the Board of Trustees in a Board Resolution passed in a special meeting called for the purpose on March 31, 2003; that the Superintendent of the Norwegian Missionary Alliance signed the Deed of Reconveyance under authority of his letter of appointment filed with the SEC and the board resolution of the mother organization passed on April 28, 2003; and that no consideration in any amount or form was paid/transferred hands for the reconveyance of the properties between the parties. Based on the foregoing representations, you now request a ruling that the reconveyance of the real properties to the precious owner, Superintendent of the Norwegian Missionary Alliance, by the recipient, Shalom Learning Center, Inc., as a result of the rescission of the previously executed deeds of donation is not subject to capital gains tax and the corresponding documentary stamp tax respectively imposed in Sections 27(D)(5) and 196 of the Tax Code of 1997. In reply thereto, please be informed Section 27(D)(5) of the Tax Code of 1997 provides that the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, is subject to the 6% capital gains tax based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the said Code, whichever is higher, of such lands and/or buildings. It is clear from the above-cited section that a capital gains tax is presumed to have been recognized on the sale of real property, classified as capital asset, by a corporation. However, in the case of rescission of the original contract, like the previously executed deeds of donation, as in this case, its subsequent reconveyance of the real properties to the original owner by the recipient, Shalom Learning Center, Inc., upon discovery that its local mission has been deprived of the said properties, since the transfer of the said properties by the previous Superintendent has never been sanctioned, the reconveyance of the said properties to the original owner by the recipient is not contemplated within the said section. This is so because the subject of the previously executed deeds of donation are the same properties subject of the deed of reconveyance and that the donor's tax, if at all, have already been paid. Similarly situated is BIR Ruling No. 068-00 dated December 14, 2000, where this Office ruled that "xxx xxx xxx ". . . it seems that the sale of the said property in your favor by Ms. Isabelita U. Macatuno is subject thereto. However, a closer perusal of the said transaction would reveal that the property subject of the same is the same property which you previously transferred in her favor under the UHLP Pag-ibig Program which, as represented, one of the requirements of which is that the Title to the property being sold should first be transferred in the name of the buyer. In other words, the transfer of Title of the property being sold should be complied with in order to fall under the UHLP Pag-ibig program. Considering, however, that after Title to the property in question had been transferred in the name of Ms. Isabelita U. Macatuno, she decided to cancel/withdraw her application with Pag-ibig, that prompted you to request that she in turn should reconvey the same in your favor, hence the instant Deed of Reconveyance. "Such being the case, this Office is of the opinion as it hereby holds that the reconveyance of the said property by Ms. Isabelita U. Macatuno in your favor on December 7, 1999 is exempt from the payment of capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997 and documentary stamp tax prescribed under Section 196 of the same Code. However, the same is subject to the documentary stamp tax of P15.00 as imposed by Section 188 of the Tax Code of 1997 on acknowledgments. (BIR Ruling No. 042-97 dated April 8, 1997) IN VIEW OF THE FOREGOING, this Office holds that the reconveyance of the aforementioned real properties by the recipient, Shalom Learning Center, Inc., to the original owner, Superintendent of the Norwegian Missionary Alliance, by virtue of a Deed of Reconveyance and Amicable Settlement of Properties without any consideration is not subject to capital gains tax and documentary stamp tax under Sections 27(D)(5) and 196 of the Tax Code of 1997. 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. IAETSC Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service