BIR Ruling [DA-552-04]

November 8, 2004 BIR RULING [DA-552-04] 1989 sale of condo unit 103-80; 422-88; 174-90 Fairland Knitcraft Co., Inc. 500 Sunset Drive Quezon City Attention: Mrs. Rosalina Y. Tan Accountant Gentlemen : This refers to your letter dated July 20, 2004 requesting on behalf of your client, Fairland Knitcraft Co., Inc. (FKCI for brevity), for a ruling on the tax consequence of the transfer of a condominium unit in its favor in accordance with the decision of the Housing and Land Use Regulatory Board, Office of Appeals, Adjudication and Legal Affairs, Office of the President of the Republic of the Philippines. The facts of the case are as follows: In December 1989, ARC Estate & Project Corp. (ARC for brevity), the builder of the Cedar Mansion Condominium Project in Pasig, Metro Manila, entered into a Contract to Sell with Arturo Po, under which ARC agreed to sell to Arturo Po Condominium Unit No. 205 at the price of P3,382,896.00, with a down payment of P1,353,158.00 and the balance payable in twelve (12) monthly installments of P169,144.83. On January 8, 1991, ARC issued a certification that as of December 15, 1990, Arturo Po had paid a total of P3,044,606.30 on the condominium unit, with a balance of P338,289.70 for which Arturo Po issued two (2) postdated checks. On January 9, 1991, Arturo Po and FKCI executed an "Assignment of Rights," whereby Arturo Po assigned to FKCI all his rights in the Contract to Sell for and in consideration of P1,500,000.00. FKCI in anticipation that ARC would cause the issuance of the title over the unit to Arturo Po, wrote a letter to ARC, through its counsel, requesting the issuance of the Certificate of Title of the condominium in its favor. ARC responded to FKCI that the Contract to Sell with Arturo Po had been rescinded on the ground that all the checks issued by Po as payment were dishonored. On September 18, 1991, FKCI refuting ARC's letter requested ARC to allow FKCI to pay the unpaid balance. ARC did not reply on FKCI's letter, hence, a case was filed by FKCI with the Housing and Land Use Regulatory Board (HLURB), Expanded National Capital Region Field Office, praying for judgment ordering ARC to accept its payment of the balance of P338,289.70 and to execute a deed of absolute sale and cause the issuance of title over the condominium unit. On the other hand, on December 4, 1991, Arturo Po filed a motion for intervention praying for a judgment ordering the reformation of the above Assignment of Rights. On December 24, 1993, a decision was rendered by the HLURB Arbiter, Abraham Vermudez, in favor of FKCI ordering ARC to accept the payment of the balance and to execute the Deed of Absolute Sale over the condominium unit, and to pay to FKCI exemplary damages and attorney's fees and to pay the cost of suit. Arturo Po also was made to pay exemplary damages, attorney's fees and the cost of suit. The said decision was appealed to the Board of Commissioners which promulgated a decision on October 12, 1995 affirming in toto the decision of the above Arbiter. A Motion for Reconsideration on the aforesaid decision was filed, however, it was denied by the Board of Commissioners in a resolution dated January 15, 1997. An appeal to the above decision was filed in the Office of the President, however, said appeal was dismissed for lack of merit on April 14, 1999. A Motion for Reconsideration of the said decision was filed, but the same was dismissed for lack of merit on July 27, 1999. After several legal maneuvers, finally, on May 8, 2002, the HLURB, Expanded National Capital Region Field Office, issued a Writ of Execution ordering the execution and satisfaction of the above decision. On May 8, 2003, the motion of FKCI praying, among other things, for an order authorizing the Clerk of Court of Pasig City to execute the Deed of Sale over the condominium unit, since ARC could no longer be found, thus, leaving the Writ of Execution unimplemented, was granted by the HLURB. On July 16, 2003, a Sheriff's Deed of Absolute Sale was issued in favor of FKCI. Further, on September 22, 2003, the omnibus motion filed by FKCI praying for an additional order requiring ARC or Arturo Po to deliver the Condominium Certificate of Title (CCT) over the aforementioned unit to FKCI was acted by HLURB, however, since ARC was nowhere to be found and Arturo Po does not possess the CCT, the HLURB directed the Register of Deeds concerned to cancel the CCT over the unit and issue a new one to FKCI. The Register of Deeds concerned, however, asked for a clearance from the BIR authorizing the registration of the property, thus, you brought the Sheriff's Deed of Absolute Sale to Revenue District Office No. 43, Pasig, for the issuance of the Certificate Authorizing Registration (CAR). The revenue officer assigned computed the capital gains and documentary stamp taxes accordingly due on the transaction plus an increment in the amount of P600,000.00, of which you were not amenable, hence, you filed this request for ruling for the proper computation of the taxes due, if any, on the Sheriff's Deed of Absolute Sale issued to FKCI. In reply thereto, please be informed as follows: 1. Since the original transaction of Contract to Sell took place in December, 1989, the pertinent laws and issuances prevailing at that time shall accordingly be applied. The ruling of this Office at that time treated the gains derived from the sale of condominium units as ordinary gains, the same being profits derived from sale of property held primarily for sale to customers in the ordinary course of trade or business and, are therefore, not subject to the capital gains tax imposed by then Section 34(h) of the Tax Code of 1977, as amended by Batas Pambansa Blg. No. 37, as implemented by Revenue Regulations No. 8-79, but to the ordinary corporate income tax imposed under then Section 24 of the Tax Code of 1977, as amended. (BIR Ruling No. 103-80 dated September 11, 1980) Moreover, under then Section 42(b)(2) of the 1977 Tax Code, as amended, sales of realty of which the initial payments or payments received by the seller during the taxable period in which the sale is made exceeds 25% of the selling price are considered as deferred payment sale for income tax purposes. aDHCAE Based on the foregoing and since in the instant case, the initial payment made by Arturo Po in the year of sale exceed 25% of the selling price, the said transaction therefore is considered as a deferred payment sale. In such case, ARC should have reported the gain it realized therefrom in its income tax return for the year 1989. The taxable gain or income returnable during the year of sale shall be the difference between the selling or contract price and the cost of the condominium unit, determined in accordance with then Section 34(a) and (b) of the Tax Code of 1977, as amended, even though the entire purchase price has not been actually received in the year of sale since in a sale on a deferred payment basis the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash. (Sec. 177 of Revenue Regulations No. 2) However, if there was failure on the part of ARC to report the above transaction for income tax purposes, the buyer or his assign/s should not be prejudiced by such omission of the said seller. (BIR Ruling 422-88 dated August 31, 1988) On the other hand, under then Section 21(e) of the Tax Code of 1977, as amended, sales, exchanges or transfers of real properties are subject to the 5% capital gains tax. However, assignments of rights over realty although classified as real property under the Civil Code, are not included within the purview of the above provision considering that in assignments of rights the assignee merely steps into the shoes of the assignor without acquiring a better right than what the assignor had in the property to which the rights assigned pertain. Moreover, a Deed of Assignment of Rights is not a Deed of Sale because what is conveyed by the assignor is not the property itself but the rights pertaining to such property. (BIR Ruling No. 174-90 dated September 10, 1990) However, if in the said transaction the assignor derived a gain, such gain shall be subject to the income tax imposed under then Section 21 of the Tax Code of 1977, as amended. Such being the case, this Office is of the opinion as it hereby holds that the above assignment by Arturo Po of his rights over the Contract to Sell covering the abovementioned condominium unit to FKCI is not subject to the 5% capital gains tax imposed under then Section 21(e) nor to the documentary stamp tax imposed under then Section 196 both of the Tax Code of 1977, as amended. Moreover, since the amount received by Arturo Po from FKCI from the above assignment of rights is less than the amount he paid to ARC, Arturo Po therefore is not subject to income tax as he derived no gain from the said transaction. However, the notarial acknowledgment of said Assignment of Rights is subject to the documentary stamp tax of P3.00 on certificates under then Section 188 of the same Code. Furthermore, the Sheriff's Deed of Absolute Sale issued in favor of FKCI is not subject to the capital gains tax nor to the withholding tax since the same is merely a formality in transferring the property to the buyer. However, the said deed is subject to the 1.5% documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, the law applicable at the time the deed was executed. The basis of herein documentary stamp tax shall be the total consideration paid for the condominium unit or the fair market value of the same as determined in accordance with Section 6(E) of the Tax Code of 1997, as amended, whichever is higher. The liability to pay the documentary stamp tax imposed under Section 196 of the Tax Code lies with the party who wants to register the property. DTaSIc Finally, the Certificate Authorizing Registration (CAR) on the transfer of the above condominium unit to FKCI shall be issued immediately in its favor upon payment of the P3.00 documentary stamp tax on the Deed of Assignment and the 1.5% documentary stamp tax imposed under Section 196 of the 1997 Tax Code. The penalties for late payment, however, shall not be imposed on the above transaction considering that the cause of the delay in paying the tax was due to the litigation that ensued thereon. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group