Development Bank of the Philippines

May 17, 2007 BIR RULING [DA-306-07] Secs. 27 (D) (5); 196; 301-2003; DA-195-2000 Development Bank of the Philippines Sen. Gil J. Puyat Avenue cor. Makati Avenue Makati City Attention: SVP Benilda A. Tejada Chief, Legal Counsel Gentlemen : This refers to your letter dated April 24, 2006 requesting exemption from the payment of income tax, capital gains tax and documentary stamp tax on the reconveyance by the Development Bank of the Philippines (DBP) of real properties in favor of Spouses Rodolfo and Clara Luz Silva in accordance with the court approved compromise agreement. The facts of the case are as follows: On December 14, 2005, a Deed of Reconveyance was executed by DBP in favor of Sps. Silva, pertinent portions of which state as follows: "xxx xxx xxx WHEREAS, to secure the payment of certain loans obtained by the Sps. Silva and Claro Inc., a corporation organized and existing under Philippine laws, with principal office at #120 Jupiter Street, Bel Air Village, Makati City (collectively, the "Borrowers") with the Bank, the Borrowers mortgaged in favor of the Bank, among other things, four (4) parcels of land, together with the improvements thereon, located at Matatdo, Paraaque City, covered by TCT Nos. (203465) 27363; (203466) 27364; (203467) 27333 and 203468, all registered in the name of the Sps. Silva (collectively, the "Mortgaged Realties"); WHEREAS, for failure of the Borrowers to pay the loan, the Bank, on September 16, 1977, foreclosed the mortgage over the Mortgaged Realties; WHEREAS, the Bank was declared the winning bidder in the foreclosure sale and the Sheriff's Certificate of Sale over the Mortgaged Realties was issued in favor of the Bank which was annotated on the covering titles thereto on November 25, 1977; WHEREAS, the foreclosure of the Mortgaged Realties and the conflicting claims of the Bank and the Sps. Silva with regard to the ownership thereof was the subject of: cDTACE (i) Civil Case No. 90-1000, filed by the Sps. Silva, against the Bank for Specific Performance with Damages and Injunction, which Civil Case was the subject of the RTC Branch 142, Makati City judgment dated May 2, 1994, . . . ; (ii) CA-G.R. CV No. 49442, an appeal filed by the Bank with the Court of Appeals, wherein the Court of Appeals rendered judgment on April 18, 2001 affirming with modification the RTC decision, . . . ; and (iii) G.R. No. 14956, Petition for Certiorari filed by the Bank with the Supreme Court, wherein the Supreme Court denied the Bank's Petition per Resolutions dated September 26, 2001 and November 19, 2001, as shown in the Entry of Judgment dated May 20, 2002, . . . ; WHEREAS, at the instance of the Court, Sps. Silva and the Bank have agreed to fully and completely settle all claims, demands and controversies regarding the above-mentioned cases. Accordingly, on January 3, 2005, the parties executed a Compromise Agreement which was submitted with the RTC Branch 42, Makati City for Judgment based on Compromise Agreement, . . . ; WHEREAS, on January 7, 2005, the RTC-Branch 42 of Makati City issued an Order approving the Compromise Agreement, . . . ; WHEREAS, Sps. Silva have fully complied with their undertakings in accordance with the terms and conditions of the Compromise Agreement duly approved by the Court by remitting to the Bank the compromise amount of P400,000.00 on September 22, 2004; xxx xxx xxx." The compromise amount of P400,000.00 corresponds to the total unpaid balance of the loan of the spouses, and the expenses made by DBP by way of land taxes paid to the City of Paraaque. Resort to execution of the Deed was necessitated because despite the existence of the Temporary Restraining Order/Writ of Preliminary Injunction issued by RTC Branch 142 of Makati City, in Civil Case No. 90-1000 restraining/prohibiting DBP from consolidating the titles in its name, DBP mistakenly effected the cancellation of three (3) titles, namely: TCT Nos. (203465) 27363, (203466) 27364 and (203467) 27333. As a consequence thereof, new titles were issued in the name of DBP, namely: TCT Nos. 33833, 33834 and 33835. The Deed was presented to the Register of Deeds of Paraaque for registration, and the parties were directed to procure a Certificate Authorizing Registration (CAR) from the BIR. When the Deed was presented with the Revenue District Office of BIR, the transaction was assessed a total tax due of P46,331.45 representing the expanded withholding tax and documentary stamp tax. It is your view that if it were not for the mistake committed by DBP in having the three TCTs of Sps. Silva cancelled and new ones issued in its favor despite the existence of the TRO/Writ of Injunction issued restraining or prohibiting the same, there would have been no need for the execution of the Deed of Reconveyance but only a Deed of Release/Cancellation of Mortgage. Notwithstanding the execution of a Deed of Reconveyance, still there was no actual sale of the three (3) lots to the spouses by DBP. The execution of the Deed of Reconveyance was resorted only to effect the restoration of the ownership of Sps. Silva over the subject properties in accordance with the compromise agreement approved by the court. In reply, please be informed that in BIR Ruling No. 301-2003 dated September 15, 2003 citing BIR Ruling No. DA-195-2000, dated March 30, 2000 involving transfer of a parcel of land by way of legal redemption, the BIR ruled as follows: " . . . please be informed that since the transfer of the subject property is in consonance with the decision of the Court of Appeals and is without consideration, the transfer of the said property in your favor is not subject to the capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997 nor to the creditable withholding tax prescribed by Revenue Regulations No. 2-98, implementing Section 57(B) of the Tax Code of 1997. xxx xxx xxx In both rulings, this Office ruled that the deed of conveyance is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, because there is no monetary consideration in the subject transfer. However, the notarial acknowledgment to the deed of conveyance is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Code of 1997 (BIR Ruling No. 027-93 dated January 15, 1993, BIR Ruling No. 115-94 dated July 1, 1994)." CaTcSA In view of the foregoing, this Office hereby rules that the Deed of Reconveyance executed by DBP in favor of Sps. Silva to effect the court approved compromise agreement, giving the spouses the right to redeem their properties, is not subject to the capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997, as amended, nor to the creditable withholding tax prescribed by Revenue Regulations No. 2-98, as amended, implementing Section 57(B) of the Tax Code of 1997, as amended. Likewise, the said Deed is not subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, as amended. However, the notarial acknowledgment to the Deed of Reconveyance is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Code. 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, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue