BIR Ruling [DA-339-00]

September 11, 2000 BIR RULING [DA-339-00] Yap, Crisanto, Salvador & Calderon Ground Floor, LMK Building 25 Bulacan Street (West Avenue) Quezon City Attention: Atty . Hernando U. Salvador Gentlemen : This refers to your letter dated May 7, 2000 stating that Spouses Federico Tan and Evangeline Tan (Spouses) executed on September 13, 1977 a Real Estate Mortgage, over a house and lot located at Whiteplains Subdivision, Quezon City covered by TCT No. 236590 issued by the Registry of Deeds for Quezon City in favor of China Banking Corporation, to secure the payment of their obligation in the principal amount of P350,000.00; that for failure of Spouses Tan to pay their obligation, the aforementioned property was foreclosed, and on June 26, 1985, said property was sold at public auction by the Ex-Officio Sheriff of Quezon City, Sheriff Marino V. Cachero, to Vicente C. Abadilla, as the highest bidder for the total amount of P450,100.00; that pursuant to the aforementioned foreclosure sale, a Certificate of Sale was registered at the back of TCT No. 236590 under P.E. 6893 dated July 1, 1985 and duly inscribed on June 26, 1985; that no consolidation of ownership could legally be effected because of the existence in 1986 of the consolidated cases entitled "Spouses Federico Tan and Evangeline Tan versus Vicente Abadilla", and "Vicente Abadilla versus Federico Tan and Evangeline Tan, et at." docketed as Civil Case Nos. 49546 and 48789, respectively, before Branch 96 of the Regional Trial Court of Quezon City involving the following issues of "whether or not there is inadequacy of the amount paid by defendants Federico Tan and Evangeline Tan as redemption price of their mortgaged property which was foreclosed by China Banking Corporation under Act 3135, as amended" and "Whether or not the same defendants-spouses are entitled to have the owner's copy of the title in the possession of the plaintiff (for being the highest bidder during the foreclosure sale) considering their payment of the redemption price during the legal redemption period of one (1) year"; that although such issued were resolved in favor of Vicente Abadilla on November 16, 1990, by the Court declaration that he is the highest and successful bidder during the said foreclosure sale, the consolation of ownership still could not legally be accomplished because of the appeal by Spouses Tan to the Court of Appeals which was docketed as CA-GR CV No. 30951, and subsequently to the Supreme Court docketed as GR No. L-125327; that prior to November 16, 1990, Vicente Abadilla executed a Deed of Assignment of Right dated June 28, 1990 in favor of Rolando S. Abadilla, Jr. whereby the former assigned and transferred to the latter all his rights, inclusive of his right to consolidate the title over the afore-described foreclosed property for the consideration of P450,100.00; that the necessary document of consolidation of ownership was made possible only by the ruling of the Supreme Court which affirmed the said judgment of the lower court; that as of January 10, 1997, the Entry of Judgment was issued in the case by the Supreme Court that its decision is final and executory; that on March 13, 2000, Rolando Abadilla, Jr. paid the capital gains tax and the corresponding documentary stamp tax, together with the surcharge, penalties and interest in the respective amounts of P96,020.00 and P5,637.50 as evidenced by Official Receipt Nos. 2593342 and 2593341 duly issued by the Development Bank of the Philippines, Makati Branch; and that on April 18, 2000, the Certificate Authorizing Registration (CAR) was issued by Revenue Region No. 7, Quezon City in favor of Vicente C. Abadilla. Based on the foregoing representations, you now request for ruling that in the determination of the tax based in computing the capital gains tax and documentary stamp tax relative to the transfer of title of the foreclosed property should be the valuation of the subject property as of the time of the foreclosure or the zonal value at the time of the execution of the said deed by Vicente Abadilla in favor of Rolando S. Abadilla, Jr.; and that if there is interest, or penalty charges involved for the late registration of ownership, it should be reckoned from the date of the turn-over of the possession of the said property by virtue of the Court Order. In reply thereto, please be informed that Article 1624 of the New Civil Code of the Philippines provides that an assignment of credits and other incorporeal rights shall be perfected in accordance with the provisions of Article 1475 of the said Code provides as follows: "Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. SHTaID "From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts." There can be no uncertainty that the contract of sale or the assignment of right as in this particular case is perfected from the moment the parties have agreed upon a determinate thing, i.e., the object of the contract and a price certain therefore, even if neither is delivered. Thus, delivery of the thing sold is not necessary for the perfection of the contract. In the case at bar, the Deed of Assignment of Right was executed by Vicente Abadilla on June 28, 1990 in favor of Rolando S. Abadilla, Jr. whereby the former assigned and transferred to the latter all his rights, inclusive of his right to consolidate the title over the afore-described foreclosed property of Spouses Tan, for and in consideration of P450,100.00 although at that time, delivery cannot be effected yet because of a pending case between Vicente Abadilla and Spouses Tan until no less than the Supreme Court has resolved the case in favor of Vicente Abadilla, as the highest and successful bidder during the foreclosure sale held on June 26, 1985, but from that time on, Rolando S. Abadilla, Jr. is subrogated to the right of the former to have the title to the property consolidated under his name where it not for the Civil Case filed later by Spouses Tan against Vicente Abadilla. Thus, since the Deed of Assignment of Right with the right to consolidate the title under his name executed on June 28, 1990 is indeed a perfected contract and can be treated as a contract of sale because of the exceptional circumstances surrounding the case, then the law, rules and regulations prevailing at the time of its execution shall be applied. Consequently, the fair market value of the foreclosed property as of June 28, 1990 or the gross selling price (i.e., P450,100.00), whichever is higher, shall be the basis in computing the capital gains tax and the corresponding documentary stamp tax. Finally, we now pass upon the issue of penalties and interest for the late payment of taxes. The rule in extra-judicial foreclosure sale is that before the expiration date of the redemption period, the vendee's right to possession of the property is contingent upon the failure of the mortgagor to redeem. After the redemption period is terminated, the right to redeem is barred, and the mortgagor is divested of his rights to the mortgaged property sold. Thus, from that time, the vendee's right of possession of the property becomes final. In the instant case, it is clear that the right of Rolando S. Abadilla, Jr. to the possession of the aforesaid property became final only when the decision promulgated by the Supreme Court on November 25, 1996 became final and executory on January 10, 1997. Accordingly, since it would be unjust to impose a tax and/or the corresponding penalties thereto to a person where there is still uncertainty as to whether or not his rights and title over a certain property is valid, the applicable time for the payment of the capital gains tax and the corresponding documentary stamp tax should be reckoned from January 10, 1997. However, inasmuch as Rolando S. Abadilla, Jr. failed to pay the said taxes on time, this Office is of the opinion, as it hereby holds, that the penalties and interest imposed under Sections 248 and 249 of the Tax Code of 1997 should be computed from the due date for payment of the taxes (i.e., capital gains tax 30 days from January 10, 1997; documentary stamp tax within 1 day from January 10, 1997) until the total taxes are fully paid. 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.) DAKILA B. FONACIER Commissioner of Internal Revenue