BIR Ruling [DA-273-05]

June 21, 2005 BIR RULING [DA-273-05] 27 (C); (D) (5); DA-091-02; DA-094-02; DA-167-02; DA-022-03 Dr. Alfredo T. Santos and Mrs. Corazon V. Santos No. 2, Road 16, Project 8 Quezon City Dr. and Mrs. Santos : This refers to your letter dated January 14, 2005 requesting for a ruling on the tax liabilities of CJ Yulo & Sons, Inc. as seller of parcels of land in the Deed of Absolute Sale executed on September 21, 2004 where the Spouses Alfredo T. Santos and Corazon V. Santos, and Marissa V. Santos, are the buyers. The facts, as represented are as follows: 1. CJ Yulo and Sons, Inc. executed the following contracts to sell in 1977, to wit: Date Contract to Sell TCT No. Lot and Selling Price No./Vendee Block No. May 3, 1977 0216/Josefina Lao RT-107791 14/21 P 84,730.00 Aug. 17, 1977 239/Si Yan Ti RT-54030 03/10 P80,200.00 Aug. 17, 1977 238/Sin Yan Ti RT-54031 02/10 P80,000.00 2. The Contracts to Sell were executed in 1977 before the effectivity of Batas Pambansa (BP) No. 37, the capital gains tax law of 1979. On September 18, 1981, Josefina Lao executed a Deed of Assignment and Transfer in favor of Flora N. Castillo. Thereafter, Flora N. Castillo executed on September 21, 1981 a Deed of Assignment and Transfer in favor of Spouses Alfredo T. Santos and Corazon V. Santos and Marissa V. Santos. On the other hand, Si Yan Ti executed a Deed of Assignment and Transfer on the above-mentioned lots in August 8, 1978 in favor of Spouses Alfredo T. Santos and Corazon V. Santos (collectively referred to as "Assignees"); 3. The Assignees paid the said lots in installment for a period of 10 years, with initial downpayment of 10% of selling price. These were fully paid on August 26, 1988. It is clear that full payment was made prior to January 9, 1990, the date of effectivity of the expanded withholding tax (EWT) under Revenue Regulations No. 12-89; 4. Since the Assignees stayed in the province for some time, they failed to execute the necessary Deeds of Absolute Sale regarding the subject properties after the full payment thereof in 1988. In order to secure the necessary clearance with the BIR, CCC Realty Corporation acting as manager of CJ Yulo and Sons, Inc., and the Spouses Alfredo T. Santos and Corazon V. Santos and Marissa V. Santos executed three (3) Deeds of Absolute Sale all dated September 21, 2004 covering the three (3) parcels of land; 5. The documentary stamps taxes on the Deeds of Sale executed on September 21, 2004 were already paid with the BIR RDO No. 28, Novaliches, Quezon City. The clearance is still pending with the said RDO because the examiner could not decide whether CJ Yulo and Sons, Inc. is exempt from the payment of the EWT/capital gains tax; and 6. The Vice-President of CCC Realty Corporation, acting as the manager of CJ Yulo and Sons, Inc. vouches that they have paid the income tax it derived from the sale of said properties as such income were included and taxed in the annual tax returns of CJ Yulo and Sons, Inc. from taxable years 1977 to 1988. HTCDcS In. reply, please be informed that Section 24(a) of the 1977 Tax Code (now Section 27), as amended, provides, to wit: "SEC. 24. Rates of Tax on Corporations . (a) Tax on domestic corporations . A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and partnership, no matter how created or organized, but not including general professional partnerships, . . ." (Emphasis supplied) It is clear from the foregoing provisions of the 1977 Tax Code (the law applicable at the time of the transaction), that in a sale, exchange or disposition of lands and/or buildings by a corporation, the source of income is the sale of realty. Necessarily, the income realized therefrom shall be subject to the ordinary income tax which shall be included in the computation of the taxable net income received during the taxable year when the transaction involving the sale, exchange or disposition of lands and/or buildings occurred. In the instant case, the income of CJ Yulo and Sons, Inc. derived from its sale of parcels of land to Spouses Alfredo T. Santos and Corazon V. Santos and Marissa V. Santos is subject to the ordinary income tax at the rate prevailing at the time said transaction was made. The Contract to Sell executed in 1977, however, is not subject to the documentary stamp tax (DST) imposed under Section 245 of the 1977 Tax Code (now Section 196) because the execution of a Contract to Sell does not vest title to the vendee and therefore, not subject to DST. Conversely, the Deed of Absolute Sale which transfers title to real property and evince the consummation of the Contract to Sell is the one subject to the DST imposed under Section 196 of the 1997 Tax Code. Thus, the operative act of transferring title to real property, for purposes of the imposition of the DST under said Section 196, is the issuance of the Deed of Absolute Sale. [ BIR Ruling No. DA-294-2003 dated September 4, 2003 ] On the other hand, the burden of paying the corporate income tax rests upon CJ Yulo and Sons, Inc., as the seller and registered owner of the subject parcels of land. Spouses Alfredo T. Santos and Corazon V. Santos, and Marissa V. Santos being the buyer has no obligation to pay the corresponding taxes due on the sale transaction. [ BIR Ruling No. DA-167-2002 dated September 17, 2002 ] Accordingly, the tax liabilities of CJ Yulo and Sons, Inc. arising from the sale of parcels of land in favor of Spouses Alfredo T. Santos and Corazon V. Santos, and Marissa V. Santos are the corporate income tax and documentary stamp tax on the Deed of Absolute Sale. 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group