BIR Ruling [DA-437-00]

December 22, 2000 BIR RULING [DA-437-00] 24 (D) (1) 105-2000 De Mesa & Ochoa Law Offices G/F Mission Garden Condominium 59 Scout Ybardolaza St. corner Sgt. Esguerra Avenue Quezon City Attention: Atty . Paquito N . Ochoa, Jr . Gentlemen : This refers to your letter dated December 7, 1999 requesting in behalf of your client, New San Jose Builders, Inc.,for exemption from the payment of the capital gains and documentary stamp taxes due on the four (4) sets of the Deed of Reconveyance executed by the buyers (registered owners) of various condominium units covered by the condominium certificates of title in favor of New San Jose Builders, Inc. It is represented that the condominium units of the following buyers Buyer CCT No. CAR No. Evelyn A. Quimel N-17544 621984A Victoriano P. Carnacete N-17565 621981A Edgardo T. Macapugay N-19411 CAE 97-000014714 Evita T. Perez N-19459 CAE 97-00001496 were previously subject of their Deed of Absolute Sale, wherein your client conveyed and transferred the same to the above named buyers and the purchase price of which appeared to have been paid by the latter to your client; that the truth of the matter is that the purchase price of the subject condominium units were not paid; that these buyers were supposed to pay the stipulated purchase price of the subject condominium units by way of a loan which they were to obtain from Real Bank, Inc.,a banking institution; that as part of the requirement of the bank and even prior to the release of the loan proceeds, your client had to transfer title of the subject condominium units to and in the name of the buyers thereof for the purpose of registering the real estate mortgage in favor of the bank; that your client executed its Deed of Absolute Sale in favor of the above buyers and paid the expanded withholding tax and documentary stamp tax due thereon; that to protect its interest in view of the fact that no payment has been actually made by the buyers to your client on the purchase price as yet when the above certificates of title were transferred in their names, said buyers executed a Deed of Reconveyance to cover any eventuality; that under the terms and conditions of the subject deeds, it was stipulated that failure on the part of the buyer to obtain the loan from the bank would render the Deed of Absolute Sale as null and void and/or of no effect whatsoever; that the subject condominium units will consequently be returned by way of a re-sale to your client; that the pertinent portion of the Deed of Reconveyance is quoted hereunder as follows: "WHEREAS, it has been agreed that the VENDOR shall sign, execute and deliver a Deed of Reconveyance over the subject property in favor of the herein VENDEE in case the Letter of Guaranty issued by Real Bank on the request of NSJBI for the take-out of the proceeds of the housing financing of the Vendor is not implemented for any reason or cause beyond the control of the herein parties." cEaSHC that it is clear therefore that your client was not paid any consideration, the purchase price mentioned in the Deed of Absolute Sale, in view of the buyers failure to obtain the loan from Real Bank; that in that case, the above stipulation in the Deed of Reconveyance applies; and that it is your contention that the buyers, who are now the transferors, of the subject condominium units, should not be held liable to pay any capital gains and documentary stamp taxes imposed by the Internal Revenue Code. In reply, please be informed that Section 24(D)(1) of the Tax Code of 1997 provides, viz: "(D) Capital gains tax from Sale of Real Property . "(1) In General . The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporation shall be determined either under Section 24(A) or under this Subsection, at the option of the Taxpayer." From the foregoing, it is clear that the above provisions of the Tax Code does not apply to the reconveyance by the buyers of the property in question to New San Jose Builders, Inc., since the said reconveyance was done due to the non-payment of the purchase price of the subject condominium units arising from their failure to obtain the loan from the bank and with the end view of transferring the title of the said property back to New San Jose Builders, Inc. without monetary or valuable consideration and, therefore, not subject to the capital gains tax imposed under the above-quoted provisions of Section 24(D)(1) of the Tax Code of 1997. The same is likewise true in the case of the creditable withholding tax prescribed under Sec. 2.57.1(J) of Revenue Regulations No. 2-98 implementing Section 57(B) of the Tax Code of 1997 (BIR Ruling No. DA-015-97 dated January 14, 1997). However, all payments made by the buyers in favor of New San Jose Builders, Inc. as a consequence of the said sale transaction which were not returned to the buyers by New San Jose Builders, Inc. are taxable income to the latter and therefore subject to the creditable withholding tax prescribed under Section 57(B) of the Tax Code of 1997. In fine, whatever income which will be derived by the buyers by virtue of the said reconveyance shall be subject to income tax. Moreover, the said reconveyance is not also subject to the documentary stamp tax prescribed under Section 196 of the Tax Code of 1997, since under Revenue Regulations No. 26 otherwise known as the Revised Documentary Stamp Tax Regulations, conveyances of realty without valuable consideration is not subject to the documentary stamp tax. (BIR Ruling No. DA-015-97 dated January 14, 1997) However, the acknowledgment on the said Deed of Reconveyance is subject to a documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. aHCSTD Finally, the documentary stamp taxes imposed and paid on the valid but later on cancelled Deeds of Absolute Sale executed by New San Jose Builders in favor of the buyers are not refundable for lack of legal basis. 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.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group