BIR Ruling [DA-255-03]

August 6, 2003 BIR RULING [DA-255-03] 219; 050-96, 127-99, 031-00 Equitable PCI Bank Equitable PCI Bank Towers Makati Avenue cor. H. V. dela Costa St. Makati City Attention: Atty. Jessie A. Matibag Assistant Vice President Dear Sir : This refers to your letter dated August 28, 2002 requesting that actions be taken as follows: "a) Canceling and/or lifting the Notice of Tax Lien over the following properties: i. TCT No. T-41893 (ANNEX A), ii. TCT No. T-41894 (ANNEX B), iii. TCT No. T-43752 (ANNEX C), iv. (TD) No. 93-030-44190 (ANNEX D), v. TD No. 93-030-45024 (ANNEX E), vi. TD No. 93-030-45175 (ANNEX F), "and "b) Ordering the Regional Director of Revenue Region No. 1 and/or the concerned Revenue District Officer to issue the corresponding tax clearances applied for." It is represented that mortgaged real properties covered by TCT Nos. T-41893, T41894, T-43752, Tax Declaration (TD) No. 93-030-44190, TD No. 93-030-45024, TD No. 93-030-45175, all located in San Fernando, La Union and registered under the names of Delfin Sales, Jr., Christopher Sales, Mary Jane, Jefferson, Wilson, Jayson, all surnamed Sales, were foreclosed by the Bank due to the failure of the mortgagors/debtors to settle their secured obligation. On November 17, 1997, a public auction sale of the above properties was conducted by the Ex-Officio Sheriff of La Union, where the Philippine Commercial International Bank (now Equitable PCI Bank) submitted the highest and the winning bid. Consequently, on November 18, 1997, a Certificate of Sale over the said properties was executed by the Regional Trial Court of San Fernando, La Union in favor of the Bank. Since the creditor-bank is considered the statutory seller in extra-judicial foreclosure sales, the bank applied for, filed the returns and paid the corresponding taxes due to the BIR, i.e. , P360,240.00 for DST, and P1,200,791.20 for capital gains tax. When the mortgagors failed to redeem the properties after the expiration of the redemption period, the Bank proceeded with the consolidation of the title to the aforesaid properties. However, the Revenue District Officer of San Fernando, refused to process and issue the Certificate Authorizing Registration (CAR) over the said properties, claiming that its previous registered owners have unpaid and outstanding tax obligations. Accordingly, the BIR has already issued Assessment Notice No. 03-11-000026-94 on September 30, 1997 demanding payment for the total amount of P2,150,324.39 representing unpaid deficiency income tax and VAT against the previous owners of the properties. Records show that on October 26, 1998, the Regional Director of Revenue Region No. 1 caused the annotation of the tax lien of the BIR with the Office of the Provincial Assessor of La Union over the various TCTs/Tax Declarations involved and this was done through the filing of a Notice of Tax Lien dated August 13, 1998. The refusal by the Revenue District Office of San Fernando City to issue the corresponding tax clearance over the properties despite payment of the taxes by the Bank was duly protested but the said protest was denied by the Regional Director of Revenue Region 1 on the following grounds: 1) That the tax obligation of the taxpayer extends to and is enforceable against the taxpayer's properties as purchased by the Bank in the auction sale on November 17, 1997; 2) That notwithstanding that the tax lien was annotated only on October 26, 1998, the tax lien remains valid since the same retroacts from the date when the deficiency tax assessment was issued against the registered owners on September 30, 1997. Believing that the action taken by the Revenue District Officer and by the Regional Director is not in accord with law, the Bank now comes to this Office for the final resolution of the case. In reply, please be advised that under the prevailing rule at the time of foreclosure sale in year 1997 or prior to the issuance of Revenue Regulations No. 4-99 ( Extra-Judicial Foreclosure Sale of Capital Assets Initiated by Banks, Finance and Insurance Companies ), a mortgage sale was treated as a form of conditional sale taxable immediately upon execution. At that time, it was therefore, enough that the mortgaged real properties be foreclosed by the mortgagee bank and a public sale thereof be held for the tax to legally accrue. This treatment changed beginning with the promulgation of RR 4-99 sometime in March 1999, upon the effectivity of which taxes on foreclosure sale become due only after the expiration of the statutory one-year redemption period. Accordingly, when the Bank paid all its tax obligations upon the foreclosure sale on November 18, 1997, it should have been entitled to the issuance of the corresponding clearances as a matter of course. For this purpose, a certificate of sale is the evidence of the perfection of a contract or a sale. The said certificate comes after the actual sale. The operative act in the execution of foreclosure sales is the issuance of the Certificate of Sale (BIR Ruling No. 050-96 dated April 11, 1996). In this case, it is to be noted that no tax lien existed at the time of the foreclosure sale or when the certificate of sale was issued to the Bank on November 18, 1997. It is on record that the Regional Director of Revenue Region No. 1 caused the annotation of the tax lien of the BIR with the Office of the Provincial Assessor of La Union over the titles of the subject properties only on October 26, 1998, or almost a year after the date of the auction sale and the issuance of the certificate of sale. The bank could not, therefore, be possibly bound by a lien which ripened after it has taken effective rights, control and possession over the property in question. Such being the case, and since there was no prior encumbrance nor tax lien existing upon the properties at the time of the foreclosure sale, the Bank would be rightfully entitled to the issuance of the tax clearances applied for. The Regional Director further invokes Section 219 of the Tax Code which, among others, provides that the amount of the tax shall be a lien in favor of the government from the time when the assessment was made by the Commissioner until paid. This is not entirely correct because the retroactive effect of the tax lien applies only to final assessments. Indeed, the power of the BIR to resort to summary remedies of distraint and levy can only be employed when there arises delinquency in the payment of taxes. As confirmed by the Supreme Court, " . . . (T)he tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable . . . " [ G.R. No. L-78391, October 21, 1988, Republic vs. Ramon G. Enriquez ] Obviously, there can be no delinquent taxes or instances of the same becoming due and payable when an assessment therefor has not yet become final and executory. In this case, it was only on September 30, 1997 when the assessment notice against the former landowner/taxpayers was issued. Assuming that it was served on the date of issuance and assuming further that no protest was taken thereon, then the earliest date within which the assessment would have become final would have been thirty (30) days upon service, which would have fallen on November 30, 1997. Hence, when the bank foreclosed and paid the taxes due on foreclosure sale on November 17, 1997, there was as yet no final assessment against which the BIR could anchor a valid lien. In the natural order of things, the bank, as the judgment creditor, would have bean bound by the lien if it was registered prior to execution sale, as it would have been notified of the existence and primacy of a valid claim by the government. But not in this case where the bank had no notice of any prior lien at the time of sale. It must be noted that the payment of taxes is the personal obligation of the taxpayer-landowner, and the right of the subsequent buyer to have the property titled in his name is subordinate to the right of the state to collect the corresponding tax but only if the property is already encumbered by the tax claim and annotated in the TCT. (BIR Ruling No. 031-00 dated August 22, 2000) . Such being the case, " the well established principle must be applied that a purchaser in good faith and for value takes registered land free from liens and encumbrances other than statutory liens and those recorded in the Certificate of Title. It is an admitted fact that at the time the deeds of real estate mortgage in favor of the petitioner bank were constituted, the transfer certificate of title . . . was free from any recorded lien and encumbrances " [ G.R. No. L-33929, September 2, 1983, PHILIPPINE SAVINGS BANK vs. HON. GREGORIO T. LANTIN, et al. ] In view of the foregoing, this Office hereby directs the Regional Director of Revenue Region No. 1 and/or the concerned Revenue District Officer to issue the corresponding tax clearances applied for by the Equitable PCI Bank over the subject properties on the basis of the taxes already paid on foreclosure sale. This ruling likewise serves as the authority to the Register of Deeds/Provincial Assessor of La Union to cause the lifting of Notice of Tax Lien by cancelling the annotation of the same on Lien over the properties subject of the ruling and described under the following TCTs/TDs: (BIR Ruling No. 127-99 dated August 17, 1999) : vii. TCT No. T-41893 ( ANNEX A ), viii. TCT No. T-41894 ( ANNEX B ), ix. TCT No. T-43752 ( ANNEX C ), x. (TD) No. 93-030-44190 ( ANNEX D ), xii. TD No. 93-030-45024 ( ANNEX E ), xi. TD No. 93-030-45175 ( ANNEX F ) This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be deemed null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group