BIR Ruling [DA-361-03]

October 8, 2003 BIR RULING [DA-361-03] Danilo A. Duncano Regional Director Revenue Region No. 4 San Fernando, Pampanga S i r : This refers to the letter of your predecessor, Antonio F. Montemayor dated August 14, 2001 stating that on July 2, 2001, spouses Wilfredo and Emerita Cruz executed a Deed of Donation thereby donating a certain real property in favor of their son. Said document was presented with the Revenue District Office of San Fernando. However, in the process of computing the taxes due, it was learned by the investigating Examiner that the same property was previously mortgaged with the Rural Bank of Guagua, Inc.,for One Million (P1M) Pesos, which amount is higher than the zonal value. In connection therewith, you would like to know whether the amount of consideration in the mortgage contract could be used as basis in computing the donor's tax. In reply, please be informed of the provisions of Sections 99(A) and 102 in relation to Section 88(B) and 6(E) of the National Internal Revenue Code of 1997 which provide: "Section 99. Rates of Tax Payable by Donor . (A) In General . The tax for each calendar year shall be computed on the basis of the total gifts made during the calendar year ..." "Section 102. Valuation of Gifts Made in Property . If the gift is made in property, the fair market value thereof at the time of the gift shall be considered the amount of the gift. In case of real property, the provisions of Section 88(B) shall apply to the valuation thereof." cETCID "Section 88. Determination of the Value of the Estate . xxx xxx xxx (B) Properties . The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be, whichever is the higher of (1) The fair market value as determined by the Commissioner, or (2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessor." Section 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement . xxx xxx xxx (E) Authority of the Commissioner to Prescribe Real Property Values . The Commissioner is hereby authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers both from the private and public sectors, determine the fair market value of real properties located in each zone or area. For purposes of computing any internal revenue tax, the value of the property shall be, whichever is the higher of: (1) The fair market value as determined by the Commissioner, or (2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors." (emphasis supplied). Section 100 of the Tax Code of 1997 can not apply in this case because the same pertains to a sale transaction wherein the property is transferred for less than an adequate and full consideration than the fair market value. The aforequoted provisions of the Tax Code sets as a rule to consider for purposes of computing any internal revenue tax. Stated differently, the basis should be the fair market value as determined by the Commissioner or the fair market value fixed by the Provincial or City Assessors whichever is higher at the time the gift was made. While it may be true that the property was mortgaged much higher than the fair market value, still it could not be used as basis in computing the donor's tax due because it is not sanctioned by the Tax Code. STcaDI Please be guided accordingly. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group