BIR Ruling [DA-209-01]

October 19, 2001 BIR RULING [DA-209-01] Aviado & Fidelino 802 S. Medalla Building 1 Gen. McArthur Avenue Araneta Center, Cubao, Quezon City Attention: Atty. Ramon F. Aviado, Jr. Gentlemen : This refers to your letters dated October 18, 2000 and April 18, 2001 requesting on behalf of your clients, Preferred Lending Corporation and its stockholders, for a ruling as to whether the proposed conveyance of realty by the stockholders-trustees to the beneficiary company is exempt from capital gains and documentary stamp taxes. It is represented that sometime in May, 1994, the Peralejo and Sarmienta groups decided to jointly put up a lending investor company to be named Preferred Lending Corporation, to be located in Kamuning, Quezon City, in a site then being offered for sale; that on May 21, 1994, and before the incorporation papers could be finalized, Peralejo and Sarmienta purchased the above-mentioned property for Php1,063,000.00, with the agreement that this would be for their proposed company, and the funds used are to be considered a mere advance by them; that on November 3, 1994, Preferred Lending-Corporation was finally incorporated and duly licensed; that it started to carry on its business using the acquired premises; that in accordance with their agreement, stockholders-trustees Peralejo and Sarmienta are now planning to formally convey the above-mentioned property to Preferred Lending Corporation, the beneficiary company. In reply, please be informed that an express trust concerning real property cannot be proven by parol evidence (Art. 1443, Civil Code of the Philippines). The existence of an express trust according to law and to established jurisprudence, cannot be proven by mere parol evidence and cannot rest on vague and uncertain evidence or on loose, equivocal or indefinite declarations. Thus, regarding its enforceability and binding effect to third persons, a trust therefore, must be in a public instrument and registered in the Registry of Property. (Formalities Re Express Trusts: Ci vil Co de, Annotated, by Paras, p. 789). Moreover, in the case of Cuaycong vs. Cuaycong, [G.R. No. L-21616 December 11, 1967.] the Court had an opportunity to apply Article 1443 of the Civil Code in barring parol evidence to prove alleged creation of an express trust over immovables. Applying the foregoing in the case at hand, the alleged unilateral express trust created by Peralejo and Sarmienta for the benefit of Preferred Lending Corporation will not, therefore, bind the Government, it being bereft of the formalities required by law. Such being the case, the alleged proposed reconveyance of property by stockholders Peralejo and Sarmienta in favor of Preferred Lending Corporation pursuant to the alleged unilateral express trust is, as a general rule, subject to the capital gains and documentary stamp taxes imposed under Sections 24(D)(1) and 196 of the Tax Code of 1997, respectively, based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the same Code, whichever is higher, unless otherwise exempt under pertinent provisions of the Tax Code of 1977, as amended, which does not appear to be the case in this particular instance. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group