BIR Ruling [DA-312-03]

September 24, 2003 BIR RULING [DA-312-03] 27 (D) (5) DA-148-2002 Prime East Properties, Inc. 1101 East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City Attention: Atty. Paterno C. Pajares SVP-Counsel Gentlemen : This refers to your letter dated August 8, 2001 requesting for confirmation of your opinion that the Deed of Quitclaim and Undertaking executed by Interport Resources Corporation (IRC) in favor of Antipolo Properties, Inc. (API),now Prime East Properties, Inc. (PEP),is not subject to capital gains and documentary stamp taxes. Based on your representations, as well as from the documents submitted, including the decision of the Supreme Court in the case of Republic vs. Court of Appeals (204 SCRA 160 [1991]),the facts are as follows: 1. IRC is presently the registered owner of several parcels of land covered by Transfer Certificates of Title (TCT) Nos. M-8813, M-8815 and M-8817 issued by the Registry of Deeds of the Province of Rizal, covering an area of One Million Five Hundred Sixty Two Thousand Nine Hundred Ninety (1,562,990) square meters, One Million Eight Hundred Twenty Five Thousand Eight Hundred Fifty Three (1,825,853) square meters, and Two Million Fifty Eight Thousand One Hundred Twenty Two (2,058,122) square meters, respectively. 2. TCT Nos. M-8813, M-8815 and M-8817 are transfers from TCT Nos. M-2094/T-11, M-2097/T-11 and M-2099/T-11, respectively. Each of the above-mentioned titles was originally registered in the Registration Book of the Office of the Register of Deeds of Rizal, Volume T-94, Page 177, as Original Certificate of Title No. 633, pursuant to Decree No. 6145, issued in L.R.C. (GLRO) Record No. 2350. The said Decree No. 6145 was originally registered in the name of Francisco and Hermogenes Guido. 3. The above-mentioned parcels of land were formerly part of the property subject of a complaint filed by the Republic of the Philippines, represented by the Solicitor General, on August 22, 1979 in Civil Case No. 3442 of the then Court of First Instance of Rizal, for the declaration of nullity of Decreto No. 6145, the owner's duplicate copy of TCT No. 23377, and all titles derived from said decree, and the declaration of the parcel of land covered by the said decree as belonging to the state, except so much thereof as had been validly disposed of to third persons. Named as defendants in the said case were: (1) Antonina, Margarita, Feliza, Crisanta and Candida, Lee Guido, who claim to be the heirs of Francisco Guido and whose spouses were joined as defendants; (2) Esperanza, Alfredo (who died during the pendency of the case and was substituted by his heirs),Eufronia, Gliceria, Priscilla, Profetiza, Buenaventura, Buensuceso and Carlos, all surnamed Guido, who claimed to be the heirs of Hermogenes Guido and whose respective spouses were joined as defendants; (3) Spouses Jose and Emiliana Rojas; (4) Pacil Development Corporation; and (5) Interport Resources Corporation. IRC had acquired certain portions of the land in exchange for its shares of stock, from Pacil Development Corporation, which in turn, had acquired the land from Jose Roxas; Jose Roxas, on the other hand, had acquired the land by virtue of an Extra-Judicial Settlement of Estate with Quitclaim dated December 17, 1973 executed by the heirs. TDAcCa 4. After trial, the Court of First Instance rendered judgment dismissing the complaint and declaring Decree No. 6145 and TCT No. 23377 genuine and authentic. The Solicitor General appealed the decision to the Court of Appeals, which affirmed the decision on July 12, 1988. On July 16, 1988, the Solicitor General filed a motion for reconsideration of the decision of the Court of Appeals, wherein he prayed for an alternative judgment declaring the decree and its derivative titles authentic, except with respect to such portions of the property which were either: 1) possessed and owned by bona fide occupants who had already acquired indefeasible titles thereto; or 2) possessed and owned by bona fide occupants and their families with lengths of possession which amounted to ownership. The Court of Appeals denied the motion for reconsideration, for which reason, the Solicitor General appealed the decision to the Supreme Court on October 14, 1988 in the earlier-mentioned case of Republic vs. Court of Appeals, supra. 5. On May 19, 1989, IRC filed a manifestation before the Supreme Court, to the effect that on May 15, 1989, it had entered into an Agreement with the Presidential Commission on Urban Poor (PCUP) for the disposition of five hundred (500) hectares of the property involved in the case for the use of deserving urban poor and to help the government in its objective of alleviating the squatter problem in Metro Manila area. In the same manifestation, it also stated that it had agreed to accept the alternative prayer of the Solicitor General. Subsequently, all the private respondents in the case filed a joint memorandum adopting IRC's manifestation accepting the Solicitor General's alternative prayer, and praying that judgment be rendered based on said alternative prayer. 6. On November 21, 1991, the Supreme Court ruled as follows: "It should be noted however, that prior to the reconstruction of TCT No. 23377 on March 29, 1976, [there was] no record in the Office of the Register of Deeds of Rizal to show of the existence of any registered title covering the land area subject of this case. The Court takes judicial notice of the fact that prior to said date, certain portions of the area were in the possession of occupants who successfully obtained certificates of titles over the area occupied by them. There were also occupants who had not obtained certificates of titles over the area possessed by them but the lengths of their possession were long enough to amount to ownership, had the land been in fact unregistered. This fact is admitted by the parties. Although prescription is unavailing against private respondents because they are holders of a valid certificate of title, the equitable presumption of laches may be applied against them for failure to assert their ownership for such an unreasonable length of time (only in 1976) against subsequent occupants. The records showed that it was only in 1974 when they tried to obtain an original certificate of title. When rebuffed by the L.R.C. they applied for a reconstitution of a TCT only in 1976. In the recent case of Lola v. CA ,G.R. No. L-46573, Nov. 13, 1986, 145 SCRA 439, citing the cases of Pabalete v. Echarri, Jr. ,G.R. No. L-24357, 37 SCRA 518, 521, 522 quoting Mejia de Lucas v. Gamponia ,100 Phil. 277, it was held that "although the defense of prescription is unavailing to the petitioners (Pablo and Maxima Lola) because, admittedly, the title to Lot No. 5517 is still registered in the name of the respondent (Dolores Zabala),still the petitioners have acquired title to it by virtue of the equitable principle of laches due to the respondent's failure to assert her claim and ownership for thirty two (32) years." Moreover, conscious of the resulting "largescale dispossession and social displacement of several hundreds of bona fide occupants and their families" which the Solicitor General pointed out; the private respondent agreed unanimously to accept the alternative prayer of the petitioner in their joint memorandum (pp. 624636, Rollo ).This agreement by private respondents takes the form of waiver. Though a valid and clear right over the property exists in their favor, they seemingly have voluntarily abandoned the same in favor of: 1) those who possessed and actually occupied specific portions and obtained torrens certificates of titles, and 2) those who possessed certain specific portions for such lengths of time as to amount to full ownership. The waiver, not being contrary to law, morals, good customs, good policy, is valid and binding on the private respondents. However, with respect to the second set of possessors, whose alleged bona fide occupancy of specific portions of the property is not evidenced by Torrens Titles, it is imperative that their claims/occupancy be duly proven in an appropriate proceeding." 7. API purchased several parcels of land from different possessors belonging to those parties who possessed certain specific portions of IRC's real properties for such lengths or time as to amount to full ownership, covered by TCT Nos. M-8813, M-8815 and M-8817 through several Deeds of Sale involving properties located at Matang Tubig, Darangan, Binangonan, Rizal, described as follows: VENDOR VENDEE Date of AREA Tax Dec. Year Execution No. Issued Julio; Felicidad; Ester; Antipolo June 23, 1993 48,962 sq 06-1862 1985 Charito; Letty and Properties, mtrs. Antonio; all surnamed Inc. Garrovillas Segundina; Paulino; Antipolo June 29, 1993 13,568 sq. 06-2436 1986 Proceso and Adela; all Properties, mtrs. surnamed "Carigma" Inc. Mamerto A. Antipolo June 1, 1993 27,901 sq. 06-1820 1985 Tantiongco Properties, mtrs. Inc. Claudia Garrovillas Antipolo March 10, 18,842 sq. 06-1864 1985 Properties, 1993 mtrs. Inc. Tomas Carigo and Antipolo May 12, 1993 32,669 sq. 06-1865 1985 Ruperta Carigo Properties, mtrs. Inc. Paulino Carigma and Antipolo June 29, 1993 26,167 sq. 06-2435 1986 Adela Carigma Properties, mtrs. Asuncion Inc. Ignacio San Luis Antipolo March 1993 57,880 sq. 06-0190 1985 Properties, mtrs. Inc. Julia; Victoria; Antipolo March 1993 8,468 sq. 06-1863 1985 Timotea; Florentina Properties, mtrs. and Nicasio; all Inc. surnamed "Inguito" Anastacia De Rosas Antipolo July 23, 1993 8,436 sq. 13172 1959 Properties, mtrs. Inc. Agustin Mangila and Antipolo Dec. 29, 1993 39,933 sq. 06-1861 1985 Amelia Mesa Mangila Properties, mtrs. Inc. Cresencio; Renato; F. Jacinto May 29, 1996 21,987 sq. 06-4143 1993 Maximo and Teofila; Group, mtrs. all surnamed Inc./Antipolo Alejandro Properties, Inc. F. Jacinto Group, Inc. Antipolo May 29, 1996 21,987 sq. 06-1857/ 1995 Properties, mtrs. TCT No. M- Inc. 35902 Melitona Estate, Inc. Antipolo, Nov. 26, 1993 168,360 sq. 06-1826/TCT 1985 Properties, mtrs. Nos. 263012 Inc. & 352929 8. On December 29, 1994, IRC and API entered into a Deed of Quitclaim and Undertaking, whereby IRC admitted and confessed API's absolute ownership over certain portions of the property covered by TCT Nos. M-8813, M-8815 and M-8817. Relevant portions of the Deed of Quitclaim and Undertaking, which explain the background thereof state: SDEITC "WHEREAS, the decision of the Supreme Court in the case of the Republic of the Philippines versus the Court of Appeals, et. al. ,promulgated on 21 November 1991, reported in 204 SCRA 160, and which is now final and executory, recognizes the validity of the titles of IRC over several parcels of land mostly, if not all, situated in Binangonan, Rizal, which titles are TCT Nos. M-8812 to M-8825, inclusive; WHEREAS, while said decision recognizes the validity of IRC's aforementioned titles, it excludes from the coverage thereof, portions of the property covered thereby, which had been titled already in the names of third parties (first exception; and those portions of the same property which, though not so titled in the names of third parties are being held by parties who could prove in an appropriate proceeding before a proper forum their possession thereof for such length of time as to amount to full ownership over the same (hereinafter referred to as the second exception); WHEREAS, API is the unregistered owner and possessor of certain parcels of land (hereinafter referred to as landholdings) with an aggregate area of THREE HUNDRED FIFTY SIX THOUSAND AND TWENTY ONE (356,021) square meters, more or less, all situated in Sitio Matang Tubig, Darangan Binangonan, Rizal, which API and its predecessors-in-interest have been in actual, adverse, notorious, continuous and public possession, in the concept of an owner for such length of time as to amount to full ownership over the same; WHEREAS, the aforestated landholdings of API are parts and parcels of the land covered by three of the torrens certificates of title of IRC which are TCT Nos. M-8813, M-8815 and M-8817, copies of which are hereto attached as Annexes "A","B" and "C",respectively, and made integral parts hereof; WHEREAS, the extent of API's aforestated landholdings in relation to the area covered by IRC's TCT Nos. M-8813, M-8815 and M-8817, are plotted, projected and defined in the technical plans for the lands, correspondingly covered by TCTs of IRC aforesaid (the blue print versions of which plans duly signed by the parties, being hereto attached as ANNEXES "D","E" and "F","F-1",and made integral parts hereof; WHEREAS, the respective portions of API and IRC of the lands covered by the aforementioned plans and projected therein as lots are as follows: ANNEX "D" (Plan for TCT No. M-8813) ANTIPOLO PROPERTIES, INC.: Lots Area 3-A 217,661 sq. m. 3-C 18,991 sq. m. 3-D 7,211 sq. m. 3-F 3,110 sq. m. SUB-TOTAL 246,973 sq. m. INTERPORT RESOURCES CORP. Lots Area 3-B 9,892 sq. m. 3-F 692 sq. m. 3-G 1,305,433 sq. m. ANNEX "E" (Plan for TCT No. M-8815) ANTIPOLO PROPERTIES, INC. Lots Area 4-A 5,326 sq. m. 4-B 20,139 sq. m. 4-C 20,381 sq. m. SUB-TOTAL 45,846 sq. m. INTERPORT RESOURCES CORP. Lots Area 4-d 1,780,007 sq. m. ANNEXES "F" and "F-1" (Plan for TCT No. 8817) ANTIPOLO PROPERTIES, INC. Lots Area 8-A 37,275 sq. m. 8-B 25,927 sq. m. SUB-TOTAL 63,202 sq. m. INTERPORT RESOURCES CORP. Lots Area 8-C 1,994,920 sq. m. ANTIPOLO PROPERTIES, INC. INTERPORT RESOURCES, INC. Grand Total = 356,021 sq. meters Grand Total = 5,090,944 sq. meters WHEREAS, the extent of API's aforestated landholdings in relation to the area covered respectively by IRC's aforestated TCT Nos. M-8813, M-8815 and M-8817 are plotted, projected and defined, in the technical plans for the lands correspondingly covered by each of the TCT's of IRC, copies of such plans, duly signed by the parties herein, are hereto attached as Annexes "D","E","F" and "F-1",respectively, and made integral parts hereof; WHEREAS, after a careful and exhaustive examination of the documents of API showing the character and extent of API's possession, as well as that of its predecessors-in-interest, over its aforesaid landholdings, IRC is fully convinced that said possession of API is such as to amount to its full ownership of its aforesaid landholdings and, therefore falling categorically within the second exception under the aforecited decision of the Supreme Court." 9. It appears that API filed a case against IRC to enforce the above-mentioned Deed of Quitclaim and Undertaking, docketed as Civil Case No. 98-030-B with the Regional Trial Court of Binangonan, Rizal Branch 68. On January 15, 1999, the Regional Trial Court promulgated a Judgment on the Compromise Agreement between IRC and API. Pertinent portions of the Compromise Agreement dated November 3, 1998, on which the judgment is based, state: "Parties, assisted by counsel, in order to settle this case once and for all, hereby stipulate and agree as follows: 1. That the lots sought to be segregated in this case from the lots covered by defendants's TCT No. M-8813 (Annex "B" to the petition and marked as Exh. "B");TCT No. M-8815 (Annex "D" to the petition and marked as Exh. "C") and TCT No. M-8817 (Annex "E" to the petition and marked as Exh. "F") are the very same lots subject of that certain DEED OF QUITCLAIM and UNDERTAKING, executed by the parties herein, ratified before, and entered in the Notarial Protocols of Notaries Public Lani M. Tabilisima as Doc. No. 479, Page No. 097, Book No. VII, Series of 1994 and Alicia E. Bathan, as Doc. No. 828, Page No. 52, Book No. XXXVI, Series of 1994, submitted to the record and marked as Exhibit "T"; 2. That the same Deed of Quitclaim, etc. mentioned above is the very same Deed of Quitclaim, etc. annotated on January 20, 1995 in each of the aforesaid TCT Nos. M-8815 and M-8817, as Entry No. 84192; 3. That any discrepancies in the areas of such lots sought to be segregated as stated, first, in the segregation plans for the same (Annexes "B","D","F" and "F-1" to the petition and marked as Exhibits "A","C","E" and "E-1",respectively);second, in the petition and, third, in the aforementioned Deed of Quitclaim, etc.,are all honest mistakes, and that the parties herein agree to be bound as they are hereby bound firmly and irrevocably by the areas given for the same in the segregation plans for such lots which may be submitted to, and approved by the Bureau of Lands or its equivalent agency; which approved plan and technical description thereof shall be binding and conclusive upon the parties; HDAaIc 4. That on the basis of the documentary exhibits presented by petitioner and the stipulation of facts submitted by the parties into, and forming part of the record of this case, respondent hereby admits and confesses not only the lawful acquisition by petitioner of the lots sought to be segregated in this case, but also the uninterrupted, open, public, notorious or adverse possession, since time immemorial, of the same lots, by petitioner and its predecessors-in-interest, which possession amounts to ownership in fee simple of the same lots, by petitioner; 5. That the parties hereby agree to have the same lots segregated in accordance with the plan or plans of segregation as approved by the Bureau of Lands or its equivalent agency and the titles on the lots so segregated issued to petitioner pursuant to the technical description for the same issued by the Bureau of Lands; 6. That the parties herein pray that this Honorable Court decides this case on the basis of the foregoing agreement which is not contrary to law, morals or public policy; The above-mentioned judgment has become final per Certificate of Finality dated February 1, 1999, issued by Leonardo C. Aseoche, Officer-in-Charge of the abovementioned Regional Trial Court. In reply, please be informed that since the properties subject of the Judgment on the Compromise Agreement between IRC and API are covered by the Supreme Court decision in the case of Republic vs. Court of Appeals, supra ,(that is, the second exception, or, as stated by the Supreme Court, "the second set of possessors, whose alleged bona fide occupancy of specific portions of the property is not evidenced by Torrens Titles", and therefore for whom "it is imperative that their claims/occupancy be duly proven in an appropriate proceeding"), then the transfer of such properties to API by virtue of said Compromise Agreement, as well as the Deed of Quitclaim and Undertaking is not subject to the capital gains tax imposed under Section 27(D)(5) of the National Internal Revenue Code (NIRC) of 1997, nor to the creditable withholding tax imposed under Revenue Regulations No. 2-98, as amended. This is because there is no sale, exchange or disposition of the properties by IRC in favor of API, but rather a recognition by IRC of API's absolute ownership of the property. Moreover, for the same reason, such transfer would neither be subject to donor's tax, nor to the documentary stamp tax. However, the Compromise Agreement is subject to the documentary stamp tax of P15.00 under Section 188 of the NIRC of 1997, while the Deed of Quitclaim and Undertaking is subject to the documentary stamp tax of P10.00 under then Section 188 of the NIRC of 1977, as amended. Therefore, prior to issuance of tax clearance certificates corresponding to the deeds of sale mentioned in No. 7 above, wherein API (now PEP) is the vendee, the payment of capital gains tax or creditable withholding tax, as the case may be, and documentary stamp taxes thereon must be duly proven. It must be noted, however, that the non-taxability of the above-mentioned transaction is predicated on the fact that IRC is merely conveying to API (now PEP) what it was supposed to have acquired by purchase from those persons mentioned in No. 7 above, the segregation of the properties covered by TCT Nos. M-8813, M-8815 and M-8817 between IRC and API should be implemented strictly in accordance with the terms and conditions of the Compromise Agreement as approved by the Judgment on the Compromise Agreement dated January 15, 1999. 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. TaEIAS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group