BIR Ruling [DA-215-03]

July 9, 2003 BIR RULING [DA-215-03] 27, 98 & 196; DA 14-99; DA 136-00 & 147-92 Suarez & Associates Room 509 Manila Bank Corporation Building 6772 Ayala Avenue Makati City Attention: Atty. Ma. Victoria A. Suarez Gentlemen : This refers to your letter dated November 18, 2002 requesting for confirmation of your opinion that the conveyance from the trustee, Lilibeth Maquiran, to the beneficial owner, HRS Employment Agency Philippines, Inc . ("HRS Phils." for brevity), without monetary consideration of two (2) parcels of land located in Cabuyao, Laguna and covered by Transfer Certificates of Titles (TCT) Nos. T-439214 and T-439215 is not subject to capital gains, documentary stamp, and donor's taxes the transfer being a mere formality of restoring the title to the true and beneficial owner. It is represented that HRS Phils . is a domestic corporation organized in 1999 and granted a POEA license to operate a land-based recruitment agency; that prior to its incorporation, HRS Phils ., through its former stockholder and president, Lilibeth Maquiran, bought two (2) parcels of land located in Cabuyao, Laguna which were intended to be used by HRS Phils. to house an office and a training center for its recruits-applicants; that it was also intended to be used as lodgings for transient applicants; that the lots were registered under the name of Lilibeth Maquiran as shown by TCT Nos. T-439214 and T-439215 in the Calamba Branch of the Registry of Deeds dated February 1999 as the corporation was still in the stage of being formed; that HRS Phils. provided the funds for the payment of the subject real properties; that the amount of Eighteen Thousand Seven Hundred Fifty Pesos (Php18,750.00) paid to Prince Corporation for the transfer of said parcel of land to Lilibeth Maquiran was advanced by Tan Seng Chai, another stockholder of HRS Phils.; that Tan Seng Chai also remitted the amount of One Million Pesos (Php1,000,000.00) for purposes of starting the construction of an office building/house on the said parcels of land; that after the SEC had approved the incorporation of HRS Phils., all subsequent expenses pertaining to the construction and remittance of the house ( i.e. , real estate taxes, utilities, caretaker) were paid for by HRS Phils., totaling One Million Five Hundred Fifty Seven Thousand Seven Hundred Fifty Pesos and 50/100 (Php1,557,750.50); that it was understood that Lilibeth Maquiran held the properties in trust for HRS Phils.; that despite repeated verbal demands made by stockholders for her to turn over the properties to the corporation and/or sell the same and turnover the proceeds of the sale to the corporation, Lilibeth Maquiran repeatedly refused to turn over the properties to the corporation; that Lilibeth Maquiran's repeated refusal to turn over the properties to the corporation without any valid reason, as well as other infractions ( i.e. , discrepancies in the financial reports which she could not explain) caused the Board of HRS Phils. to suspend her from her duties as President and file estafa charges against her; that this dispute spawned other actions including the filing of RTC SEC Case No. 02-0006 (entitled HRS Employment Agency Phils. Inc. vs. Tan Seng Chai, et al.) before Branch 231 of the Regional Trial Court of Pasay City; that this case in involved, among other things, the ownership of the two (2) parcels of land covered by TCT Nos. T-439214 and T-439215; that on September 20, 2002, the parties to the above disputes were able to reach a Compromise Agreement whereby one of the clauses provided that Lilibeth Maquiran shall convey the properties covered by TCT Nos. T-439214 and T-439215 to HRS Phils.; for this purpose, Lilibeth Maquiran executed a Deed of Conveyance and Acknowledgment of Trust over said properties in favor of HRS Phils.; that the Compromise Agreement was submitted by the parties in RTC SEC Case No. 02-0006 together with a Joint Motion to Dismiss, to the court for approval on October 28, 2002; and that the same was granted in open court on the same day. In reply, please be informed that under Section 27(D)(5) of the Tax Code of 1997, a final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on 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, based on the gross selling price or fair market-value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings. In the instant case, it is clear that the conveyance by Lilibeth Maquiran of subject properties to HRS Phils. under the Deed of Conveyance is without consideration because the latter is the real owner of the said properties and it provided the funds for the payment for the said properties. Thus, an implied trust was created between Lilibeth Maquiran and HRS Phils. pursuant to Articles 1448 and 1453 of the Civil Code which state: "ART. 1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the price is paid by another for the purpose of having the beneficial interest of the property. The former is the trustee, while the latter is the beneficiary. . . . " "ART. 1453. When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated." Such being the case, and considering that the conveyance is not a sale, exchange or other disposition of the said properties but merely a surrender or restoration of the properties to its rightful owner, the same is not subject to the capital gains tax prescribed under Section 27(D)(5) of the Tax Code of 1997. This finds support in BIR Ruling No. 147-92 dated May 8, 1992 wherein this Office held: ". . . the transfer of the Q.C. property effected by the heirs of the estate of Edward M. Grimm in the Deed of Partition in favor of GP and company is not subject to capital gains tax imposed under Section 21(e) of the Tax Code, since the transfer of the title in favor of GP and Company is merely a formality of transferring to the beneficial owner thereof the title to the same and in order that the title to the said property may be registered in the name of its rightful owner without any monetary consideration. " Moreover, conveyances of realty not in connection with a sale, to trustees or other persons without consideration is not taxable pursuant to Section 185 of Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations. Moreover, it has already been settled that a Deed of Transfer of Real Property executed by a trustee in favor of the real owner without consideration is not subject to the documentary stamp tax on conveyance of real property under Section 196 of the Tax Code of 1997. However, the notarial acknowledgment to the said Deed is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of same Code (BIR Ruling No. DA-136-2000 dated March 6, 2000 citing BIR Rulings Nos. 21-98 dated February 19, 1998; 116-91 dated June 21, 1991; and 118-87 dated April 24, 1987) . STIcaE Finally, the conveyance of the subject properties is exempt from the donor's tax imposed under Section 98 of the Tax Code of 1997 due to lack of donative intent (undated BIR Ruling No. DA-014-99) 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group