BIR Ruling [DA-412-03]

November 13, 2003 BIR RULING [DA-412-03] 24 (D) (1); 196 #121-88;118-96; 169-98 Rilloraza, Africa, De Ocampo & Africa Law Offices 7th and 10th Floors, Telecoms Plaza 316 Sen. Gil Puyat Avenue Makati City Attention: Atty. Cesar G. David Counsel Gentlemen : This refers to your letter dated November 22, 2002 stating that Lacson Hermanos Agro-Industrial Corporation ("LHAIC") is a corporation which owns four parcels of land covered by TCT Nos. 6706, 6707, 6708 and 6709; that TCT No. 6706 was later subdivided into four parcels and titled as TCT Nos. 9070, 9071, 9072 and 9073; that TCT 9070 was further subdivided into three (3) parcels titled as TCT Nos. 9327, 9329, and 9330; that TCT No. 9071 was further subdivided into six (6) parcels and titled as TCT Nos. 9323, 9324, 9325, 9326, 9328, and 9331; that TCT No. 9072 was further subdivided into three (3) parcels and titled as TCT Nos. 9332, 9333, and 9334; that all of the above parcels of land were mortgaged to Republic Planters Bank to secure the payment of the obligation of the corporation in the amount of P13,366,194.58; that on November 6, 1990, the Bank assigned all its credit rights, with the securities, to one Manuel Sanchez who paid a discounted amount of P7,562,554.36; that on November 26, 1990, Manuel Sanchez cancelled the mortgage over TCT Nos. 9326, 9330 and 9334 upon payment to him of the sum of P2,000,000.00; and that on the same day, he cancelled the mortgage over TCT Nos. 6707, 6709, 9323, 9327, 9328, 9329, and 9331 upon payment to him of the sum of P3,000,000.00. In view thereof, you now ask for a ruling on whether Manuel Sanchez, as assignee, is liable for any tax on the cancellation of mortgage over the above-titled properties upon payment to him of P2,000,000.00 and P3,000,000.00 made by LHAIC. In reply, please be informed that the assignment of rights and credit over the foreclosed properties of Republic Planters Bank as the mortgagee-bank in favor of Manuel Sanchez is not subject to the capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997, since in this case, Manuel Sanchez, as the assignee, in effect became the creditor of LHAIC, thereby merely steps into the shoes of Republic Planters Bank as the one having the right as creditor-mortgagee to exercise the right to foreclose the aforesaid mortgaged properties under Act 3135, as amended by Act 4118, aside from the fact that there is no transfer of title to the real properties involved in the said deed of assignment of right to foreclose the mortgaged properties. Thus, the mortgagee bank, in assigning its credit and mortgage rights in favor of Manuel Sanchez for and in consideration of P7,562,554.36 was merely assigning whatever rights it had in said foreclosed real properties and the assignee does not acquire a better right than what the assignor-bank had in the properties to which the rights assigned pertains. (BIR Ruling No. DA-252-96 dated July 18, 1996) Moreover, the cancellation of mortgage on the eight (8) properties, executed by Manuel Sanchez in favor of LHAIC in consideration of the sum of P2,000,000.00 and P3,000,000.00, is likewise not subject to capital gains tax, since LHAIC is merely exercising its right of redemption under Act 3135 as amended by Act 4118 and no consolidation of ownership over the foreclosed properties was made by neither Republic Planters Bank nor Manuel Sanchez as the redemption was accordingly made within the redemption period. (BIR Ruling No. 121-88 dated March 25, 1988 and BIR Ruling No. DA-252-96 dated July 18, 1996) cATDIH Finally, under Article 415(10) of the Civil Code, "real rights over immovable property" are themselves immovable or real property or realty. The Deed of Assignment executed by Republic Planters Bank in favor of Manuel Sanchez is tantamount to a conveyance of real property to the purchaser and should be subject to documentary stamp tax under Section 196 of the Tax Code of 1997. In such case, the assignment of right and credit over the subject properties already involves a conveyance of a real right over the real properties subject of the mortgage. The herein transaction, as represented, involves a conveyance of real right from the assignor-bank (Republic Planters Bank) in favor of the purchaser-assignee, Mr. Manuel Sanchez. (BIR Ruling No. 169-98 dated September 10, 1998) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group