BIR Ruling [DA-540-04]

October 29, 2004 BIR RULING [DA-540-04] S85 RR 4-99 Land Bank of the Philippines Landbank Plaza 1598 M.H. del Pilar cor. Dr. J. Quintos Streets, Malate, Manila Attention: Mr. Juan A. Calisin, Jr. Head, Rizal Lending Center Gentlemen : This refers to your letter dated July 6, 2004 requesting for an opinion on whether you are required to pay the estate tax on the foreclosed property of a person who died prior to the expiration of the redemption period. The facts, as you represent, are as follows: On May 16, 2003, you foreclosed the mortgaged property of your borrower. On June 30, 2003, a certificate of sale was issued in your favor by the Regional Trial Court, which was likewise registered or inscribed at the Registry of Deeds. On November 12, 2003, the borrower died. On June 30, 2004, the redemption period expired. The borrower failed to redeem the said property. In reply, please be informed that under Section 85 of the 1997 Tax Code, it provides that: "SEC. 85. Gross Estate . The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated : Provided, however, That in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate." (Emphasis supplied.) Thus, the foreclosed property formed part of the gross estate of the borrower upon his death on November 12, 2003. However, the unpaid mortgage or indebtedness must be deducted from the gross estate for purposes of computing the net estate in accordance with Section 86 (A)(e) of the 1997 Tax Code, to wit: "SEC. 86. Computation of Net Estate . For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined: (A) Deductions Allowed to the Estate of a Citizen or a Resident . In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate xxx xxx xxx (e) For unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate , but not including any income tax upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax. The deduction herein allowed in the case of claims against the estate, unpaid mortgages or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth. There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimed as a deduction for income tax purposes in an income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91." (Emphasis supplied.) After the determination of the net estate, the corresponding estate tax imposed by Section 84 of the 1997 Tax Code shall be paid at the time the return is filed by the executor, administrator or the heirs. (Section 91 of the 1997 Tax Code). Thus, the answer to your query is in the affirmative. However, the estate tax should be paid by the executor, administrator or the heirs and not you. aSCHcA In addition, under Article 777 of the New Civil Code, it provides that: "ART. 777. The rights to the succession are transmitted from the moment of the death of the decedent." Accordingly, the foreclosed property was immediately transferred to the heirs of the borrower upon his death. Consequently, the right to redeem the same was likewise transferred to his heirs. Since the heirs opted not to exercise their right to redeem the foreclosed property within the reglementary period, the said property is now ripe for the consolidation of title in your favor. Needless to say, the corresponding capital gains tax should be paid before a Certificate Authorizing Registration may be issued as provided under Section 5 of Revenue Regulations No. 4-99. 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 void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group