BIR Ruling [DA-245-03]

July 28, 2003 BIR RULING [DA-245-03] S.27 (D); 039-91/4-3-97 Paltongan & Eduvane Law Offices 3rd Floor The World Centre, 333 Gil Puyat Ave. Ext., Makati City Attention: Atty. Domie S. Eduvane Gentlemen : This refers to your letter dated May 27, 2003 requesting, on behalf of your client, EMPIRE EAST PROPERTIES, INC. (Empire East for brevity), for a ruling on the tax implication of a Deed of Trust and Undertaking entered into by and between Empire East as TRUSTEE and RICHGOLD REALTY CORPORATION (Richgold for brevity) as TRUSTOR, pursuant to a Joint Venture Agreement, also entered into by Empire East and Richgold, to develop a parcel of land described therein with Empire East as DEVELOPER and Richgold as OWNER. The facts, as you represent, are as follows: The Deed of Trust and Undertaking essentially stipulates the following provisions, to wit: 1. "The TRUSTOR hereby agrees to convey, as it does hereby convey and transfer, its legal title over the Property in favor of the TRUSTEE . . ." (par. 1). 2. "For the protection of the TRUSTOR, this trust agreement shall be revocable upon the termination of the JVA pursuant to either par 2 or 3 of Article VIII thereof, in which case, the TRUSTOR may revoke this trust and revert the legal title to its name . . ." (par. 3) On the other hand, the joint Venture Agreement contains the following provisions, to wit: 1. "DEVELOPER hereby undertakes to develop the Property into a residential subdivision and provide therein the following improvements and facilities necessary thereto and sufficient for the level of development envisioned by the parties . . ." (Art. par. 1). 2. "DEVELOPER shall prepare the technical studies, designs and specifications for roads, curbs and gutters, underground drainage system, water distribution system, catch-basins and manholes and other conveniences and improvements of a residential subdivision . . ." (Art. I, par. 3). 3. "DEVELOPER shall, at its exclusive expense, procure all the necessary heavy equipment, labor and engineering staff to carry out the development of the Property" (Art. III, par. 1). 4. "For and in consideration of the obligations and undertaking it assumes herein, the DEVELOPER shall receive as its share sixty (60) PERCENT of the sales proceeds of the net saleable area, . . . The other forty (40) PERCENT shall be the share of the OWNER . . ." (Art. IV, par. 1) 5. "To enhance buyers' confidence in the project as well as for the convenience of both parties herein, OWNER shall execute a Deed of Trust . . . Nevertheless, ownership of the lots shall remain with the OWNER until the conditions outlined below have been fulfilled . . ." (Art. VI, par. L). The above stipulations, among others, clearly express the intention of the parties therein to transfer the legal title of the subject property covered by Transfer Certificate of Title No. T-5605 to Empire East as TRUSTEE solely for the purpose of convenience of the parties. No consideration was paid by the trustee in favor of the trustor. The trust agreement is revocable where legal title to the property is then reconveyed to the owner upon occurrence of certain conditions. It is your view that considering this is a revocable trust where there is no actual transfer of ownership over the aforementioned piece of property from the trustor to the trustee, but that the trust agreement was made solely for the convenience of the parties therein in the implementation of their Joint Venture Agreement to develop and construct a subdivision project, the transfer of the legal title over the property covered by Transfer Certificate of Title T-56-05 of the Registry of Deeds for Tagaytay City from RICHGOLD REALTY CORPORATION ("Trustor") to EMPIRE EAST PROPERTIES, INC. ("Trustee"), is not subject to capital gains tax/expanded withholding tax or income tax under Section 27 of the Tax Code particularly Sec. 27(D)(5) thereof. Furthermore, you believe that the Deed of Trust conveying the aforementioned property to Empire East as Trustee, is not subject to documentary stamp tax imposed by Section 196 of the Tax Code, pursuant to Section 63 and 64 of the Tax Code and Section 186, Regulations No. 26 or the Revised Documentary Stamp Tax Regulations. In reply, please be informed that in BIR Ruling Nos. 039-97 dated April 3, 1997, the BIR ruled that: "In reply, please be informed that pursuant to Section 27(D)(5) of the Tax Code of 1997, capital gains presumed to have been realized from the sale, exchange or other disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets shall be taxed at the rate of six percent (6%) based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. However, on several occasions, this Office has ruled that conveyance of legal title over a realty to trustees without transfer of beneficial title and without any consideration does not involve an actual transfer of ownership over such realty, hence, not subject to the capital gains tax. (BIR Ruling Nos. 039-97, 123-93, 124-93, 125-93, 126-93, 127-93, 128-93 and 129-93) Moreover, under Section 191 of the Documentary Stamp Tax Regulations (Revenue Regulations No. 26), the conveyance of property to a trustee is exempt from documentary stamp tax. Section 191 of said Regulations provides: 'Section 191. Conveyance to trustees or from trustee to cestui que trust, without consideration. Conveyances to a trustee without valuable consideration, or from a trustee to a cestui que trust without valuable consideration are not subject to tax.' xxx xxx xxx" Accordingly, this Office hereby confirms your opinion that (1) the transfer of the legal title over the property covered by Transfer Certificate of Title T-56-05 of the Registry of Deeds for Tagaytay City from Richgold as Trustor to Empire East as Trustee is not subject to capital gains tax/expanded withholding tax or income tax under Section 27 of the Tax Code particularly Sec. 27(D)(5) thereof; and (2) the Deed of Trust conveying the aforementioned property to Empire East as Trustee, is not subject to documentary stamp tax imposed by Section 196 of the Tax Code, pursuant to Section 63 and 64 of the Tax Code and Section 186, Regulations No. 26 or the Revised Documentary Stamp Tax Regulations. However, the notarial acknowledgment is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the 1997 Tax Code. EcDTIH This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By. (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service