BIR Ruling [DA-280-03]

August 25, 2003 BIR RULING [DA-280-03] Sections 73, 188; DA-099-03 Little Giant Realty Corporation P. Guevarra cor. V. Cruz Streets San Juan, Metro Manila Attention: Mr. Antonio Q. Achurra, Jr. President Gentlemen : This refers to your letter dated August 5, 2003 requesting for a ruling that the rescission of a Deed of Assignment in connection with a tax-free exchange is not taxable. It appears that Little Giant Realty Corporation and Kwong On Trading Corporation are parties to a tax-deferred transaction; that a Deed of Assignment was executed by Little Giant Realty Corporation and Kwong On Trading Corporation; that the former transferred to the latter 19 parcels of land together with the improvements thereon located at V. Cruz Street, Little Baguio, San Juan, Metro Manila covered by Transfer Certificates of Title Nos. 59082 to 59100 issued by the Register of Deeds for the Province of Rizal, in exchange for 30,000 shares of stock with an aggregate value of P3,000,000.00; that pursuant to the exchange transaction, this Office issued BIR Ruling No. SN-033-2003 dated February 27, 2003 exempting Little Giant Realty Corporation from the payment of capital gains tax under Section 40(C)(2) of the Tax Code of 1997; that in a Special Meeting of the Board of Directors of Little Giant Realty Corporation said Directors unanimously approved that the parties should reconvey to each other by way of a Deed of Reconveyance the properties which they have previously acquired, specifically, since Kwong On Trading Corporation (transferee corporation) failed in its obligation to issue and deliver the certificates of stock to Little Giant Realty Corporation; and that a Deed of Reconveyance was thereafter executed by the aforenamed parties after the rescission of the Deed of assignment. In reply thereto, please be informed that rescission of a contract does not give rise to a taxable event for two reasons: (a) the result of rescission is that it is as if there was no sale, transfer or exchange, and hence, no income is realized; and (b) the return of the object of the rescinded contract is not for monetary consideration and is merely an acknowledgment or confirmation of the title and ownership of the original owner of the property. (BIR Ruling No. DA-099-2003 dated March 28, 2003) Thus, the subsequent return of the nineteen (19) parcels of land to Little Giant Realty Corporation is a necessary consequence of a rescission of the contract. In BIR ruling No. 059-92 dated February 18, 1992, citing Article 1191 of the Civil Code on contract rescission, it was ruled that no gain shall be recognized on the return of the real property upon the rescission of a deed of absolute sale resorted to by the buyer due to the seller's non-compliance with his obligation to deliver the realty sold. It was likewise ruled that the deed of rescission shall not be subject to the documentary stamp tax, but to the P15.00 documentary stamp tax under Section 188 of the Tax Code of 1997. Accordingly, the subsequent return of the aforesaid properties to Little Giant Realty Corporation is not taxable since it is a mere reconveyance of the object of the rescinded contract and is not for monetary consideration. Besides, Section 73 of the Tax Code of 1997 provides that only distribution made by a corporation to its shareholders out of its earnings or profits, whether in money or property are taxable. ( A. Soriano Corporation vs. Commissioner of Internal Revenue, CTA Case No. 3710, July 4, 1991, affirmed in Commissioner vs. A. Soriano Corporation and CTA, CA-G.R. SP No. 26017, January 15, 1993; Commissioner vs. Brown, CA (7) 69 Fd. 602) Under the aforesaid contract between Kwong On Trading Corporation and Little Giant Realty Corporation, no corporate earnings or profits will be distributed by Kwong On Trading Corporation. THEREFORE, Little Giant Realty Corporation will not realize any taxable gain from the return of the aforesaid properties. Little Giant Realty Corporation will not receive any net beneficial income nor realize any income which is required by the Tax Code for redemption of the properties to be a taxable event. 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service