BIR Ruling [DA-205-96]

June 20, 1996 BIR RULING [DA-205-96] Castillo Laman Tan Pantaleon & San Jose Law Offices The Valero Tower 122 Valero Street, Salcedo Village 1227 Makati City Attention: Ms . Eva Policar-Bautista and Ms . Yolanda M . Eleazar Gentlemen : This refers to your letter dated April 1, 1996 stating that Castillo Laman Tan Pantaleon and San Jose (Partnership) is a registered professional partnership composed of several partners (Partners), all of whom are members of the Philippine Bar; that it is engaged in the practice of law and runs the law firm (Law Firm) known by the same name; that the law Firm was established in 1981 and for the 11 years succeeding, rented its office spaces at the Singapore Airlines Bldg., Salcedo Village, Makati City; that in December 1988, the Partnership considered the option of transferring the Law Firm to another location; that the Partners expressed willingness, for themselves and in their personal capacities, to invest in real estate acquisition in such a way that they will hold title to the property in their own names and at the same time, agree on a plan by which such acquisition can benefit the Partnership; that the Partners then decided to acquire some units (Condominium Units) at the Valero Tower Condominium in their individual capacities; that they agreed that the Condominium Units shall be used exclusively as office space of the Law Firm, until such time that they may decide otherwise; that the acquisition by the Partners of the Condominium Units necessitated their securing loans from the Urban Bank in the total amount of approximately 24.0 Million; that even while the Partners endeavored to secure the loans in their personal names the same appeared impractical at the time because of various impediments, thus: "(a) while the individual Partners expressed preference to be liable only for the portion of the loans appertaining to each of them, and to accordingly constitute separate deeds of mortgage over their pro-indiviso shares in the Condominium Units, the same was unacceptable to the bank which required an indivisible mortgage over the entirety of the Condominium Units; (b) not all Partners at that time had unencumbered real estate to mortgage to the bank; (c) the failure of the Partners, at that point in time, to definitely agree on the following matters: (i) the proposal that each Partner be given an equal vote on matters relating to the disposition of the Condominium Units, irrespective of the percentage actually held and owned; (ii) whether or not the Partners may sell portions of the Condominium Units, by way of inducement as part of the financial package to be offered, to future partners; and (iii) whether or not to establish a new corporate structure for the holding of the title. that the Partners were thus compelled, out of necessity to facilitate the grant of the loans and expedite the acquisition of the Condominium Units, to acquire the Condominium Units and take title thereto in the name of the Partnership; that the Partners had no choice but to simplify the mortgage transaction as required by the bank; that they likewise agreed that pending the finalization of internal management procedures affecting the Condominium Units, it is best to be bound by the same rules governing the Partnership in order to avoid an impasse on matters such as the conversion of the use of the Condominium Units; that the Partnership thus came to hold title to the Units only in trust for the individual Partners; that no portion of the purchase price for the Units came from the funds of the Partnership, and no benefit due to an owner on account of the use thereof, ever accrued to the Partnership itself; that the owner's equity in the Units was provided for by the Partners; the amortizations due on the bank loans were paid for by the Partners out of their own funds, and not by the Partnership; the amount of capital invested in the purchase of the Condominium Units, and not tenure and position in the Partnership (as indicated in the entitlement of each Partner to the net income of the Partnership), controlled and determined the Partner's respective percentage ownership in the Condominium Units; that apart from the Condominium Units which were collateralized to secure the bank loans, some individual Partners further constituted mortgages over their separate properties; that all other expenses related to the acquisition of the Condominium Units and not covered by the bank loans were paid for by individual Partners; that the Partners kept a ledger on the payments and disbursements made for the acquisition of the Condominium Units; that only Partners who have actually paid for a portion of the Condominium Units are deemed owners of such units, such that Partners who were admitted into the Partnership after completion of the purchase of the Condominium Units have no equity therein (excepting those who have acquired through secondary transfers from the other Partners); that the Partnership has since been allocating a portion of its earnings as rentals, which rentals are being paid out to the Partners in proportion to their respective shares in the Condominium Units; that it is clear that the registration of the Condominium Units in the name of the Partnership was prompted by convenience and the need for transitory holding and management thereof; that the Partnership, as an entity separate and distinct from the individual Partners, has no contribution to the acquisition of the Condominium Units, and can accordingly claim no right to ownership; that the arrangement by which the Partnership has been holding the Condominium Units in trust for the Partners who acquired the Condominium Units is expressed in the declaration issued by the Partnership's current Executive Committee dated December 4, 1995 and that the bank loans having been fully paid, it is now the desire of the Partners to transfer the Condominium Units in their names. In connection therewith, you are requesting confirmation of your opinion that "(i) that the transfer under the Deed of Transfer between the Partnership and the Partners, conveying to the latter the Condominium Units, is exempt from withholding or capital gains tax and from the documentary stamp tax, the reason being that the Condominium Units are held by the Partnership only in trust, and the transferees are the real owners of the said property. This position finds basis in existing BIR rulings on the subject (BIR Ruling No. 116-91 dated June 21, 1991; BIR Ruling No. 118-87 dated April 24, 1987) and (ii) that the said transfer is likewise not subject to donor's tax, there being absent a donative intent on the part of the Partnership. (See Section 91, NIRC). In reply thereto, please be informed that all sales, exchanges or transfers of real properties whether held as capital or ordinary asset by corporations are subject to the creditable withholding tax. (Revenue Regulations No. 1-90 as amended by Revenue Regulations No. 12-94) Accordingly, if as represented, the partners of the Law Firm Castillo Laman Tan Pantaleon & San Jose namely: Noel A. Laman, Ancheta K. Tan, Polo S. Pantaleon, Felipe T. Cuison, Roberto V. San Jose, Eva Policar-Bautista, Paulino N. Dio, Mel A. Macaraig, Ma. Victoria D. Sarmiento and Ramon S. Esguerra are the real owners of the aforementioned condominium units in the Valero Tower Condominium which are covered by the following Condominium Certificates of Title issued by the Register of Deeds for Makati City: Title No. Unit No. Area (sq.m) 23542 2A 172.63 23550 2B 179.59 23551 2C 174.91 23552 2D 174.65 23553 3A 174.25 23543 3B 181.21 23544 3C 174.91 23545 3D 167.95 23549 4A 172.63 23548 4B 181.21 23547 4C 176.53 23546 4D 169.57 2,100.04 no corporate income tax accrued and became collectible under the creditable expanded withholding tax provisions of Revenue Regulations No. 1-90 as amended by Revenue Regulations No. 12-94, on account of the Deed of Transfer which pertains only to the transfer of the condominium units from the trustee Law Firm to the real owners partners of said Law Firm. Moreover, since, as represented, the Deed of Transfer of said Condominium Units executed by the Law Firm in favor of the partners has no consideration because the latter are the real owners of said property and the former acted only as trustee, it is subject only to the documentary stamp tax on certificates imposed under Section 188 of the Tax Code, as amended and not to the documentary stamp tax on deed of sale and conveyance of real property imposed by Section 196 of the same Code. Moreover, considering that there is no donative intent when the Law Firm through its Executive Committee executed the Deed of Transfer of the said Condominium Units in favor of the partners, it is not therefore subject to the donor's tax. (BIR Ruling No. 118-87 dated April 24, 1987, 116-91 dated June 21, 1991) 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 without force and effect. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)