BIR Ruling [DA-314-06]

May 10, 2006 BIR RULING [DA-314-06] 22 (B); DA-192-2001 / DA-465-2004 Dalaya Properties, Inc . 142 15th Avenue, Cubao Quezon City Attention: Mr. Rogelio B. Urbina President Gentlemen : This refers to your letter dated November 18, 2005 requesting for an exemption from the payment of capital gains tax relative to the transfer by Nelson Apsay of several parcels of land to Dalaya Properties, Inc. (DPI) as its share in a joint venture agreement. Documents submitted show that Nelson Apsay (Landowner) is in the process of transferring titles of its subdivided property through a "Deed of Absolute Conveyance" (under Sec. 80 of the Property Registration Decree (PD 1529) and Rule 39, Sec. 10 of the Rules of Court) to DPI as the latter's share in the Joint Venture Agreement (JVA) executed on 1992 covering an area of 38,330 sq.m. as evidenced by Transfer Certificate of Title (TCT) No. M-37853. DPI had started developing the said properties into a subdivision project when it encountered a problem, where the Laguna Lake Development Authority (LLDA) opposed the project claiming that the subject property is part of the shore land area of Laguna de Bay and should not be developed into a subdivision project. Because of the opposition LLDA, the project was forced to stop. DPI suggested to the landowner to liquidate the project but Mr. Apsay refused, and so DPI filed a Complaint in court for the rescission of the above-stated JVA and to transfer titles over the subdivided property as its corresponding share in the developed area. On April 25, 2005, a Decision was rendered by Hon. Fatima Gonzalez-Asdala, Presiding Judge of RTC Branch 89-Quezon City, the dispositive portion of which reads as follows: "WHEREFORE, premises considered, judgment is hereby rendered as follows: 1. The Joint Venture Agreement dated 27 January 1992 and the Addendum to the Joint Venture Agreement dated 22 April 1994 are hereby RESCINDED. 2. Defendant is ordered to transfer in plaintiff's name titles of the following lots as its share in the developed area: a. Lot 1 Block 1, Pcs-045804-007528 under Transfer Certificate of Title No. M-42542; b. Lot 2 Block 1, Pcs-045804-007528 under Transfer Certificate of Title No. M-42543; c. Lot 3 Block 1, Pcs-045804-007528 under Transfer Certificate of Title No. M-42544; d. Lot 15 Block 2, Pcs-045804-007528 under Transfer Certificate of Title No. M-42599 e. Lot 16 Block 2, Pcs-045804-007528 under Transfer Certificate of Title No. M-42600 f. Lot 17 Block 2, Pcs-045804-007528 under Transfer Certificate of Title No. M-42601 g. Lot 18 Block 2, Pcs-045804-007528 under Transfer Certificate of Title No. M-42602 h. Lots 1 to 8 Block 2, Pcs-045804-007528 under Transfer Certificate of Title No. M-42623; to M-42630 inclusive; i. Lot 1, Pcs-04-013653 under Transfer Certificate of Title No. 111101; and j. Lot 3, Pcs-04-013653 under Transfer Certificate of Title No. 11103; 3. Defendant is ordered to pay plaintiff in the following actual damages: a. the amount of P600,000.00 representing the cash advance granted to defendant with 24% interest reckoned from date of filing of this civil case until fully paid; DIEACH b. The amount of P200,000.00 representing the disturbance compensation paid to tenant by plaintiff with 24% interest reckoned from the date of filing of this civil case until fully paid. c. The amount of P1,114,070.00 representing the 50% of defendant's share the amount paid to Hernandez, et al. for a right of way with 24% interest reckoned from the date of filing this civil action; d. The amount of P200,000.00 representing the attorney's fees plus P2,500.00 as appearance fee for every actual court appearance attended; e. To pay the cost of suit. SO ORDERED" The said Decision became Final and Executory. On July 14, 2005, the Presiding Judge Hon. Fatima Gonzales-Asdala issued a "Writ of Execution" ordering defendant Apsay to transfer to DPI the titles of the subject lots. By virtue of the Writ of Execution issued, a "Notice of Conveyance" was sent to defendant Apsay by Sheriff Bultchan J. Fabila. Despite said Notice of Conveyance, Mr. Apsay still refused to comply thereto, and so on September 13, 2005, acting on an Ex-parte Motion filed by plaintiff DPI, an "ORDER" was issued designating and authorizing Atty. Perlita Vitan-Ele, the Clerk of Court of RTC, OCC, Quezon City to execute the necessary Deed of Reconveyance for and behalf of defendant Nelson Apsay in favor of Plaintiff DPI. Another Order was likewise issued by Judge Asdala ordering Atty. Ele to execute the Deed of Conveyance for the subject lots on behalf of Nelson Apsay. On October 27, 2005 Atty. Ele executed a "Deed of Absolute Conveyance". Considering that the several parcels of land which are the subject of the Deed of Absolute Conveyance are DPI's share in the Joint Venture project with the landowner, DPI is of the opinion that it is exempt from the payment of capital gains tax. In reply, please be informed that the conveyance to DPI of its corresponding share over the developed subdivision lots thru a Deed of Absolute Conveyance is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the said transfer is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) AIECSD The Deed of Absolute Conveyance entitling DPI to a share over the developed properties, in consideration of its contribution is also not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation was made, as a return of the capital contributed. However, the acknowledgement to said Deed of Absolute Conveyance is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing its property, the landowner, neither sells, barters, exchanges goods, properties nor render services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) It is understood however, that in the event of subsequent disposition by the parties of the areas allocated to them, the gain that may be realized by them from such sale will be subject to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 24(D), as the case may be. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, based on the gross selling price or fair market value of the property, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service