BIR Ruling [DA-229-99]

April 13, 1999 BIR RULING [DA-229-99] Lores Realty Enterprises, Inc. 557-A M. Earnshaw, Sampaloc Manila Attention: Mr . Lorenzo Y . Sumulong III Marketing Director Gentlemen : This refers to your letter dated April 27, 1998 stating the following: 1. Wilfredo T. Diamante (Diamante) married to Delia Diamante, and Victorino B. Anyayahan (Anyayahan) married to Socorro D. Anyayahan, are the registered owners of Lot 4-A and Lot 4-B, both of Blk. 27, Lores Country Homes located at Antipolo, Rizal under TCT Nos. 178443 and 178444, respectively; LibLex 2. Cynthia Pet is the owner of Lot 5 Blk 27 of said subdivision under TCT No. 165943; 3. Marino Umali, Quirino Tan and Salvador Tan (Umali, Tan and Tan) are the registered owners of Lot 6 Blk. 27 of said subdivision under TCT No. 181346; 4. Mr. Diamante and Mr. Anyayahan inadvertently constructed their respective houses in Lot 5, instead in Lots 4-A and Lot 4-B; while Cynthia Pet constructed hers at Lot 6, instead of at Lot 5; and Marino Umali, Quirino Tan and Salvador Tan have built their houses at Lot 7; Umali, Tan & Tan have no more problems as Lot 7 is already in their names. 5. In order to remedy the mistakes, and finding it impractical to physically transfer the houses to the proper lots, above parties, together with the developer, executed a Memorandum of Agreement on July 27, 1998 and a Deed of Reconveyance on August 12, 1998 whereby exchanges without additional consideration will be affected such that a. Cynthia Pet will convey title over Lot 5 to Diamante and Anyayahan and the same shall be partitioned to become Lots 5-A and 5-B; b. Diamante and Anyayahan will re-convey title over Lots 4-A and 4-B in favor of Lores Realty Enterprises, Inc. c. Umali, Tan and Tan will convey title over Lot 6 in favor of Cynthia Pet. that you believed that the above transaction is designed to correct the series of mistakes/errors mentioned in No. 4 and that no one among the parties will realize any gain, whether actual or presumed, and that you are of the opinion that the same is not subject to capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997. cdpr Based on the foregoing representation and documents submitted, you are now requesting for a ruling confirming your opinion that the execution of any document for the purpose of correcting an error, as in this case, is not subject to any income tax and consequently from the capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997. In reply, please be informed that under then Section 24(D)(1) of the Tax Code of 1997, capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales by individuals, including estates and trusts, shall be taxed at the rate of 6% based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher. In the instant case, however, the execution of the Memorandum of Agreement and Deed of Reconveyance designed to correct the series of mistakes/errors abovementioned without consideration and not to sell, exchange or otherwise dispose of real properties for the purpose of conveying title to the purchasers for a consideration is not subject to the capital gains tax imposed under then Section 24(D)(1) of the Tax Code of 1997 and to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended (now also Section 196 of the Tax Code of 1997) since its execution is merely a formality being undertaken to place the rightful owners thereof to their respective real property which was triggered when Mr. Diamante and Mr. Anyayahan inadvertently constructed their respective houses on Lot 5 owned by Cynthia Pet who likewise constructed her house on Lot 6 owned by Mariano Umali, Quirino Tan and Salvador Tan who in turn constructed their houses in Lot 7. However, the notarial acknowledgment on the Deed to be executed is subject to the documentary stamp tax of P15.00 under Section 188 of the Tax Code, as amended (now also Section 188 of the Tax Code of 1997). Accordingly, your opinion to this effect is hereby confirmed (BIR Ruling No. 178-94 dated December 14, 1994). 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, and/or any of the requirements set forth in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)