BIR Ruling [DA-213-06]

April 5, 2006 BIR RULING [DA-213-06] Sections 24(D) (1), 188 & 196; DA-092-02 & DA-148-03 Ms. Florinda B. De La Cruz c/o CS Metal Craft & Valenzuela Mfg. Kilometer 16 MacArthur Highway Bo. Coloong, Valenzuela City M a d a m : This refers to your letter dated August 10, 2005 requesting for a ruling that the assignment of real properties by virtue of a Compromise Agreement approved by the Regional Trial Court is not subject to capital gains tax (CGT). Documents show that on September 21, 1994, your (petitioner) filed a Petition for Separation of Properties Under the Regime of Co-ownership with Injunctive Relief with the Regional Trial Court (RTC) of Valenzuela City, Branch 75 under Civil Case No. 4475-V-94. On November 21, 1994, you and respondent, Virgilio Santos and intervenor, Leonora San Diego Santos, executed a Compromise Agreement. On January 19, 1995, the RTC-Branch 75 issued an Order giving due course and approving the Compromise Agreement which became final and executory on February 8, 1995. The said Trial Court ordered respondent to assign in your favor all his rights in the following parcels of land the improvements thereon: "a) TCT No. T-114723 located in Valenzuela, Metro Manila, containing an area of 200 square meters. b) TCT No. V-23538 located in Valenzuela, Metro Manila, containing an area of 291 square meters. c) TCT No. V-23539 located in Valenzuela, Metro Manila, containing an area of 240 square meters. d) TCT No. V-28928 located in Valenzuela, Metro Manila, containing an area of 218 square meters. e) TCT No. V-28929 located in Valenzuela, Metro Manila, containing an area of 226 square meters. f) TCT No. V-28930 located in Valenzuela, Metro Manila, containing an area of 218 square meters. g) TCT No. V-28931 located in Valenzuela, Metro Manila, containing an area of 218 square meters. h) TCT No. T-146672 (M) located in Marilao, Bulacan, containing an area of 201 square meters. i) TCT No. T-28.326 (M) located in Sta. Maria, Bulacan, containing an area of 338 square meters. j) TCT No. T-28.327 (M) located in Sta. Maria Bulacan, containing an area of 454 square meters. k) TCT No. 33483 (M) located in Valenzuela, Metro Manila, containing an area of 195 square meters. l) TCT No. V-33484 (M) located in Valenzuela, Metro Manila, containing an area of 224.50 square meters. m) TCT No. V-33485 located in Valenzuela, Metro Manila, containing an area of 224.50 square meters. n) TCT No. V-33486 located in Valenzuela, Metro Manila, containing an area of 224.50 square meters. o) TCT No. 33487 located in Valenzuela, Metro Manila, containing an area of 186.50 square meters. p) TCT No. V-33488 located in Valenzuela, Metro Manila, containing an area of 186 square meters. q) TCT No. V-33489 located in Valenzuela, Metro Manila, containing an area of 186 square meters. r) TCT No. V-13289 located in Valenzuela, Metro Manila, containing an area of 670.50 square meters." It appears that the aforesaid properties were acquired by you and respondent during your cohabitation. In consideration of all the above, you shall pay the respondent the sum of Seven Million Pesos (PhP7,000,000.000). EICScD In reply, please be informed that under Section 24(D)(1) of the Tax Code of 1997, a final tax of six percent (6%) based on the gross selling price or the current fair market value as determined in accordance with Section 6(E) of the same Code, whichever is higher, is imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines classified as capital asset including pacto de retro sales and other forms of conditional sales by individuals, including estates and trusts. Article 148 of the Family Code of the Philippines provides "Chapter 7. Property Regime of Unions Without Marriage xxx xxx xxx Art. 148. In cases of cohabitation not falling under the preceding Article, only the properties acquired by both of the parties through their actual joint contribution of money, property, or industry shall be owned by them in common in proportion to their respective contributions. In the absence of proof to the contrary, their contributions and corresponding shares are presumed to be equal. The same rule and presumption shall apply to joint deposits of money and evidence of credit. xxx xxx xxx." The juridical condition of co-ownership of things or right is terminated, among others, by partition which converts into certain and definite parts the respective undivided shares of the co-owners (Articles 494 and 496, Civil Code and cited in BIR Ruling No. DA-092-02 dated May 13, 2002). Under Article 496 of the Civil Code, partition as a mode of terminating co-ownership may be made by agreement between the parties or by judicial proceedings. Partition shall be governed by the Rules of Court insofar as they are consistent with the Civil Code (cited in BIR Ruling No. DA-148-03 dated May 6, 2003). In your case, however, there was no distribution of the co-owners' respective undivided shares since all the titles were transferred from the co-ownership to only one (1) co-owner. In view of the foregoing, the assignment of the aforementioned properties in your favor pursuant to a Court Order approving the Compromise Agreement you executed with the respondent is subject to the 6% CGT under Section 24(D)(1) of the Tax Code of 1997. The assignment of the properties is equivalent to a conveyance with monetary consideration. Very truly yours, (SGD.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service