BIR Ruling [DA-375-04]

July 6, 2004 BIR RULING [DA-375-04] 24 (D) (1); DA-030-2004 Ayala Land, Inc. Tower One, Ayala Triangle Ayala Avenue, Makati City Attention: Atty. Cynthia H. Poblador, Vice President-Legal and Atty. Valerie C. Feria, Manager-Legal Gentlemen : This refers to your letter dated January 15, 2004 requesting for a confirmation of your opinion that the Deed of Rescission and Reconveyance executed by and between Community Innovations, Inc. (CII) and Brigitte A. Ignacio is not subject to capital gains tax under Section 24(D)(1) of the Tax Code of 1997 and the documentary stamp tax under Section 196 of the same Tax Code. The facts as you represent are as follows: CII, a corporation organized and existing under Philippine laws and a subsidiary of Ayala Land, Inc. (ALI) is engaged in the business of real estate development. Among CII's project is Verdana Homes, a residential subdivision in Bacoor, Cavite. In 2003, Brigitte A. Ignacio, an employee of Standard Chartered Bank (Bank), signified her intention to purchase from CII the Verdana Homes lot identified as Lot 4, Block 10 and covered by Transfer Certificate of Title No. T-1024051 (the Lot), and further thereto, sought to obtain an employee housing loan from the Bank. As a condition for the approval of Ms. Ignacio's employee housing loan, the Bank required that the title to the Lot as well as the Tax Declaration in respect thereof must be in the name of Ms. Ignacio. Accordingly, for the purpose solely of complying with the foregoing Bank requirement, a Deed of Absolute Sale conveying title to the Lot to Ms. Ignacio was entered into on October 10, 2002 by and between CII and Ms. Ignacio, notwithstanding that the consideration for the Lot remained unpaid. Subsequent to the execution of such Deed of Absolute Sale and before any payment of the purchase price of the Lot will be disbursed by the Bank or received by CII, Ms. Ignacio reconsidered her earlier decision to purchase the Lot, and chose not to proceed with both the sale and the corresponding application for financing from the Bank. Taking into account Ms. Ignacio's decision to desist from purchasing the Lot and given that no consideration was paid by or on behalf of Ms. Ignacio in connection with the executed Deed of Absolute Sale, the parties have agreed to rescind the same and reconvey the title to the Lot to CII, as the true and actual owner thereof, by way of a Deed of Rescission and Reconveyance. In reply, please be informed that in BIR Ruling No. DA-030-2004 dated January 16, 2004, the BIR ruled that: ". . . the transfer of titles of the lots by the developer to the buyers was done merely for the purpose of loan approval. Such conveyance did not produce any legal effect, since the developer failed to receive the consideration for the sale, hence it cannot be said that the properties have been properly disposed, transferred or conveyed by the developer in favor of the buyers, pursuant to Article 1352 of the Civil Code, stating: "Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatsoever. xxx xxx xxx "Consequently, since the Deeds of Absolute Sale between Brixton and the buyers failed to effect the transfer of ownership of the properties for lack of consideration, the Deeds of Reconveyance executed by the buyers so as to effect the return of the subject properties to the developer are not subject to the capital gains and documentary stamp taxes prescribed in Section 24 (D)(1) and 196 of the Tax Code of 1997, respectively. In view of the foregoing, this Office rules and so holds that the Deed of Rescission and Reconveyance executed by and between CII and Brigitte A. Ignacio for the purpose merely of restoring the parties to their previous status, as if no such Deed of Absolute Sale was executed is not subject to capital gains tax under Section 24(D)(1) of the Tax Code of 1997 and the documentary stamp tax under Section 196 of the same Tax Code. 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 null and void. aHDTAI Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service