BIR Ruling [DA-352-06]

June 6, 2006 BIR RULING [DA-352-06] DA 099-05 Mr. Virgilio J. Calaguas J.M. Marcos Street, San Juan Metro Manila S i r : This refers to your letter dated May 22, 2006 stating that Erlinda Fabella owns 93% of Fabella Realty Corporation a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that the Corporation's assets consist of two (2) parcles of land located in Shaw Boulevard, Mandaluyong City covered by Transfer Certificate of Title (TCT) Nos. 19477 and 19478; that a Deed of Absolute Sale dated March 15, 1980 was executed by Fabella Realty Corporation in favor of Elnor Investment Company whereby the former transferred to the latter the above-mentioned properties in consideration of the latter to assume the obligations of the former with Far East Bank and Trust Company (FEBTC) and having forestalled the foreclosure of these parcels of land which Fabella Realty Corporation presented as collateral to FEBTC; that however, on July 31, 1980 and after the execution of the alleged sale, Fabella Realty Corporation paid the amount of P500,000.00 to Elnor Investment Company, Inc. which amount is entered in the Revised Statement of Account of Elnor Investment Company, Inc. as of December 31, 1980 signed by its accountant, Nonilo Torres on January 7, 1981; that for lack of evidence to support Elnor's allegations regarding the nature of P500,000.00 it received from Fabella Realty Corporation, together with the unexplained continued collection of rentals by Esperanza Fabella and/or Fabella Realty Corporation, the Court of Appeals in the case of Spouses Erlinda Fabella, et al. vs. Elnor Investment Co., Inc. docketed as CA-G.R. CV No. 23514 ruled that ". . . this Court is of the opinion and so holds that the contract entered into on March 15, 1990 between Fabella Realty and Elnor Investment was one of equitable mortgage. Wherefore, the plaintiff-appellees are given sixty (60) days within which to redeem the property in litigation by paying to the defendant-appellant the amount of six hundred eighty thousand pesos (P680,000.00), which is the balance left from the original loan amount of P1,180,000.00 recorded as having been paid by Elnor Investment in the Statement of Account ( supra ) read in evidence in the instant case minus the partial payment of P500,000.00. Defendant-appellant Elnor Investment shall have the right to foreclose in case of the failure of the plaintiffs-appellees to pay the above-mentioned amount within the time specified by this Court. "PREMISES CONSIDERED, the decision appealed from is SET ASIDE and a new judgment is hereby rendered: 1. Declaring the contested "Deed of Sale" or "Deed of Absolute Sale" marked Exhibit 1 and denominated as Doc. No. 78, Page No. 17, Book No. IV, Series of 1980 in the Notarial Register of Susana Cruz-Pingol to be one of equitable mortgage; 2. Giving the herein plaintiffs-appellees Sixty (60) days from the date of the finality of this judgment within which to redeem the litigated property by paying to the defendant-appellant the amount of Six Hundred Eighty Thousand Pesos (P680,000.00), failing which the defendant-appellant would have the right to foreclose. "SO ORDERED." that the aforesaid decision was affirmed by the Supreme Court and its decision was promulgated on May 5, 1993; that in compliance with the Decisions rendered by the Court of Appeals and the Supreme Court, Elnor Investment Co., Inc. executed a Deed of Reconveyance on March 21, 2006 in favor of Fabella Realty Corporation whereby the former transferred to the latter the above-mentioned parcels of land without any monetary consideration. In connection therewith, you now request confirmation of your opinion that the Deed of Reconveyance executed on March 21, 2006 by Elnor Investment Company, Inc. in favor of Fabella Realty Corporation relative to the two (2) parcels of land is not subject to capital gains tax and the corresponding documentary stamp tax. In reply thereto, please be informed that in BIR Ruling No. DA099-05 dated March 31, 2005 which is a reiteration of BIR Ruling No. 009-95 dated January 16, 1995 , the BIR ruled that ". . . the execution of a Deed of Reconveyance by the Spouses Cawili and Marissa Cawili reconveying the aforesaid real property in favor of Aurora R. Magno (now Aurora M. Panaguiton) and Manuel R. Magno being merely a formality of restoring title to the said property in the name of its true owners, hence, without any consideration, is not likewise subject to the capital gains tax imposed under Section 21(e) of the Tax Code, as amended, and to the documentary stamp tax imposed under Section 196 of the same Code. However, the notarial acknowledgment to the said Deed of Reconveyance is subject to the documentary stamp tax of P10.00 pursuant to Section 188 of the Tax Code, as amended. DcICEa Inasmuch as the transfer of the two (2) parcels of land by Elnor Investment Company, Inc. to Fabella Realty Corporation is by virtue of the Court Order declaring the Deed of Absolute Sale executed on March 15, 1980 as an equitable mortgage, and aforesaid transfer is without monetary consideration but is merely to restore the titles to the said properties to the real owner, Fabella Realty Corporation, the Deed of Reconveyance executed by Elnor Investment Co., Inc. in favor of Fabella Realty Corporation is not subject to capital gains tax or creditable withholding tax and the corresponding documentary stamp tax respectively imposed under Section 27 (D) (5) of the Tax Code of 1997 or Revenue Regulations No. 2-98, as the case may be, and Section 196 of the said Code. WHEREFORE, in view of the foregoing , this Office is of the opinion as it hereby holds that Deed of Reconveyance executed on March 21, 2006 by Elnor Investment, Inc. in favor of Fabella Realty Corporation is not subject to capital gains tax and the corresponding documentary stamp tax. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service