BIR Ruling [DA-375-06]

June 15, 2006 BIR RULING [DA-375-06] 27 (D) (5); 196; 003-2004 Ms. Rosita P. Cario No. 9 King Christian Street Kingspoint Subd., Novaliches Quezon City M a d a m : This refers to your letters dated October 27, 2005 and November 10, 2005 requesting in effect for a ruling on whether the transfer of title of a real property in your favor as a partial satisfaction of a judgment is exempt from the payment of capital gains tax. It is represented that in a labor case docketed as NLRC NCR Case No. 12-06549-2001, entitled Rosita Platon Cario vs. St. Thomas Security Investigation Agency, Inc., et al ., the National Labor Relations Commission (NLRC), in a decision in your favor, ordered St. Thomas Security Investigation Agency, Inc., Blue Guard Welfare System, Big Brother, Inc., Goldleaf Guard Services, Crown Check Security International, Inc., the respondents, to pay to you your unpaid salary, backwages and benefits plus damages as your monetary judgment award. In the absence of garnishable cash, the NLRC Sheriff levied the properties of the respondents, covered by Transfer Certificates of Title Nos. 161775 and 161785, both of the Registry of Deeds of Quezon City and registered in the name of Crown Security Check International, Inc., one of the respondents. The foregoing properties are not used in the business of Crown Security Check International, Inc. Subsequently, the Sheriff conducted an auction sale and a Certificate of Sale was issued in your favor as the winning bidder. To date, after a year and without any redemption made, the Sheriff issued a Final Deed of Sale to you as a partial satisfaction of the judgment. In this regard, you feel that the above case should be exempted from the capital gains tax due to the following reasons: 1) No gain in the true sense was realized by you; 2) It is a form of payment of backwages in lieu of cash; 3) It forms part of the satisfaction of judgment as rendered by the NLRC; and 4) Unlike in foreclosure sale, the mortgagee owner benefited from the property thru loans and the mortgagor bank derived income thru interest and charges. Besides, the loan value of the property is only 60% of the market value hence there is gain. Likewise, you are requesting for a waiver of the surcharge, penalty and interest on the taxes to be imposed, if any, on the ground that there exists a difficult question of law. ICHAaT In support of your request you submitted photocopies of the following documents: 1) NLRC Decision in your favor awarding you backwages, benefits, attorney's fees and damages (moral and exemplary); 2) Notice of Levy; 3) Sheriff's Final Deed of Sale; and 4) Titles to the above-mentioned properties. In reply, please be informed as follows: 1) The amount received corresponding to your backwages and the. amount representing your unpaid salary are remuneration for services that are deemed to have been performed by you for your company prior to or during the period of your illegal dismissal from the service as affirmed by the NLRC. Such being the case, said backwages and the amount representing your unpaid salary are subject to income tax and consequently, to the withholding tax on wages pursuant to Section 79, Chapter XIII, Title II of the Tax Code as implemented by Revenue Regulations No. 2-98, as amended. (BIR Ruling No. 003-2004 dated January 19, 2004) However, considering that the amount representing your unpaid salary and the backwages were paid by way of levy and transfer of properties in your favor in satisfaction of the judgment awarding you as such, said wage payments and the amount paid to you for unpaid salary, therefore, are not subject to the withholding tax. Instead, you are required to declare the same as part of your taxable income. In filing your annual income tax return, you should report as income and pay your income tax by allocating or spreading your backwages and the amount paid to you as unpaid salary, for the corresponding years such wages or salary have been earned. (BIR Ruling Nos. 057-83 dated April 12, 1983, DA-290-99 dated May 13, 1999, DA-100-2002 dated May 30, 2002 and DA-154-2003 dated May 13, 2003) On the other hand, the amount representing the 13th month pay you received from the time you were constructively dismissed up to the time of your reinstatement is exempt from income tax, the same being treated as an exclusion from the gross income under Section 32(B)(7)(e) of the Tax Code of 1997. The penalty, surcharge and interest for late payment of taxes shall not be imposed herein considering that a difficult question of law as to the tax treatment of the foregoing circumstances exists. (Sec. 2 (2.4) of Rev. Regs. No. 13-2001) In addition, the award of moral and exemplary damages is not subject to withholding tax. Neither is the attorney's fee, the same being merely a reimbursement of your expenses or advances in the course of litigation. (BIR Ruling No. DA-100-2002 dated May 30, 2002) 2) The conveyance of the real properties by Crown Check Security International, Inc. in your favor as payment of your unpaid salary, backwages and benefits plus damages is subject to the capital gains tax. The subject real properties are considered as capital assets of Crown Check Security International, Inc. Thus, the transfer thereof in your favor through the auction sale is subject to the capital gains tax under Section 27(D)(5) of the Tax Code of 1997, as amended, which provides, viz.: "Sec. 27. Rates of Income Tax on Domestic Corporation . Capital Gains Realized from the Sale, Exchange, or Disposition of Lands and/or Buildings. A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings." The Certificate Authorizing Registration (CAR) on the transfer of the above realties in your name shall be issued immediately in your favor after payment of the documentary stamp taxes. This, however, is without prejudice to the right of the BIR to assess and collect from Crown Check Security International, Inc. the capital gains tax due thereon. The penalty, surcharge and interest for late payment of the above taxes, likewise, shall not be imposed considering that a difficult question of law as to the tax treatment of the foregoing circumstances exists (Sec. 2 (2.4) of Rev. Regs. No. 13-2001). However, this waiver of the penalty, surcharge and interest shall be effective only up to the time this ruling shall be received by you. DAaIEc Finally, the capital gains tax due on the above transfer of realties shall constitute a tax lien thereon and shall be annotated on the titles of said realties. A copy of this ruling is being furnished to the Regional Director of Revenue Region No. 2, Quezon City, for appropriate action on the liabilities of Crown Check Security International, Inc. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service