BIR Ruling [DA-414-06]

July 4, 2006 BIR RULING [DA-414-06] 24 (D) (1); 196; DA-102-2003 Mrs. Rina N. Lim No. 35 Rd. 8-B, United Paraaque 5 Sucat, Paraaque M a d a m : This refers to your letter dated January 3, 2006 indorsed to this Office by the Chief, Legal Division, Revenue Region No. 8, Makati City, relative to your request for an opinion on the tax consequence of the transfer of two (2) real properties you conjugally owned with your husband, Mario C. Lim, in favor of your children by virtue of the decision rendered by the Regional Trial Court of Paraaque City, Branch 258, National Capital Judicial Region, on May 29, 1998 in Civil Case No. (94-3050) 94-0361 for Declaration of Nullity of Marriage. Pertinent portion of the decision states as follows: "3. Petitioner Rina N. Lim and respondent Mario C. Lim's conjugal house and lot in United Paraaque which the former is amortizing with the Development Bank of the Philippines as well as the property in Tagaytay City covered by Certificate of Title No. T-21959 of the registry of Deeds of Tagaytay City (Exhibit "J") are hereby awarded to their children and the Register of Deeds of Tagaytay is hereby ordered to cancel said title and issue a new one after payment of the legal fees, in the names of their children in co-ownership pro-indiviso, namely: Mark Gregory, Rachelle Jhoana, Rosanna Joy and Rosemarie Jean, all surnamed Lim." In the said decision your Marriage with Mario C. Lim on December 8, 1973 is declared null and void pursuant to Article 36 of the Family Code, as amended. In reply, please be informed that since you were married with Mario C. Lim in the year 1973, which was before the effectivity of the Family Code, the Court in its decision presumed that the property regime governing your property relationship is the conjugal partnership of gains. Thus, the properties you and your spouse acquired during your marriage are considered conjugal. When the court issued the Decree of Nullity of Marriage, a complete separation of property regime automatically governed your property relationship as the conjugal partnership has been dissolved and liquidated, and the net profits would be shared equally by you and your spouse in accordance with Article 43 of the Family Code, as amended, in relation to Article 50 thereof. In the instant case, however, the court ruled that the conjugal properties consisting of a house and lot located in United Paraaque which is being amortized by you shall be awarded to your children in co-ownership pro-indiviso upon its full payment as well as the property in Tagaytay City covered by Transfer Certificate of Title No. T-21959 of the Registry of Deeds of Tagaytay City in accordance with the second paragraph of Article 50 of the Family Code, as amended, in relation to Article 129 thereof. Pertinent portions of Article 43, 50 and 129 of the Family Code, as amended, provide as follows: SIacTE "ART. 43. The termination of the subsequent marriage referred to in the preceding Article shall produce the following effects: xxx xxx xxx (2) The absolute community of property or the conjugal partnership, as the case may be, shall be dissolved and liquidated, . . . ." "ART. 50. The effects provided for by paragraphs (2), (3), (4) and (5) of Article 43 and by Article 44 shall also apply in the proper cases to marriages which are declared void ab initio or annulled by final judgment under Articles 40 and 45. The final judgment in such cases shall provide for the liquidation, partition and distribution of the properties of the spouses, the custody and support of the common children, and the delivery of their presumptive legitimes , unless such matters had been adjudicated in previous judicial proceedings. . . . ." "ART. 129. Upon the dissolution of the conjugal partnership regime, the following procedure shall apply: xxx xxx xxx (8) The presumptive legitimes of the common children shall be delivered upon partition in accordance with Article 51. . . . ." [Emphasis supplied] Such being the case, the transfer of the above-mentioned conjugal properties in favor of your children, which is considered as a delivery of their presumptive legitimes pursuant to Article 50 of the Family Code, as amended, is not subject to capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997, as amended. Likewise, said transfer of properties or delivery of presumptive legitimes is not subject to the documentary stamp tax imposed under Section 196 of the same Code. Neither is it subject to the donor's tax imposed under Section 98(A) of the Tax Code of 1997, as amended, there being no donative intent on your part and your spouse because the transfer is only in compliance with the order of the court. However, an annotation of the transmission of such properties to the children as their presumptive legitimes must be made in the corresponding transfer certificates of title covering such realties, for estate tax purposes. (BIR Ruling No. DA-102-2003 dated April 1, 2003) The said properties being considered as advances on the children's. legitime pursuant to Article 51 of the Family Code, as amended, shall be included in the gross estate and subject to the estate tax, if any, only upon death of either of you and your spouse. The subject properties shall be included in your and your spouse's estate pro rata or divided equally as said properties are your conjugal properties. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service