BIR Ruling [DA-577-04]

November 12, 2004 BIR RULING [DA-577-04] RMO No. 41-91; 101-89 and 118-91 Board of Liquidators 399 Minerva St., Cor. J.P. Laurel Street San Miguel, Manila Attention: Mr. Edwin S. Arcilla Executive Director Gentlemen : This refers to your letter dated September 22, 2004 requesting for exemption from the payment of capital gains and documentary stamp taxes on the sale of the real properties of Ofelia B. Santos, thru a public auction, in favor of the Republic of the Philippines. Documents submitted show that the Board of Liquidators (BOL), now an agency under the Department of Finance, was tasked to liquidate the assets of the defunct Reparations Commission (REPACOM) and to go after its debtors or end users of its assets who have outstanding accounts at the time of its abolition; that Bernardino Shipping Co., Inc. ("Bernardino Shipping") is among the end users of REPACOM's assets that fails to pay its obligation; that prior to the abolition of REPACOM and the take-over by BOL of its assets, REPACOM had filed already a case for collection against the shipping company docketed as Civil Case No. 106103 with then Court of First Instance of Manila, Branch 26; that as a consequence, the heirs of Teodorico and Graciano Bernardino, namely, Leoncia T. Bernardino, Ofelia B. Santos and Alexander T. Bernardino, major stockholders of Bernardino Shipping, requested for a re-structuring of the original Contract of Conditional Sale of Reparations Goods which was executed in 1965; that REPACOM and the aforementioned heirs executed a Supplemental Contract of Conditional Sale of Reparations Goods which was approved by the court on December 29, 1980 in its decision in the above-mentioned civil case; that Bernardino Shipping still failed to pay its obligations, thus, a Writ of Execution was issued on March 10, 1983 commanding the sheriff to levy the realties and to put under distraint personalities owned by Bernardino Shipping and of its stockholders; that among the real properties levied were owned by Ofelia B. Santos, specifically, three (3) parcels of land located at Bulacan and covered by Transfer Certificates of Title (TCT) No. T-192310, T-192311 and T-192312 of the Registry of Deeds of the Province of Bulacan; that on November 5, 1992, the above parcels of land were sold at public auction in favor of REPACOM, as the highest bidder for the sum of P1,500,000.00; that a Certificate of Sale was issued in favor of REPACOM on the same date; that after the lapse of the one-year redemption period, the sheriff issued a Sheriff's Final Deed affirming the sale of the above properties to REPACOM; that BOL, as the liquidator of the assets of REPACOM, wanted to effect the consolidation of ownership and the issuance of new titles over the above-mentioned properties in its favor executed an Affidavit of Consolidation of Ownership dated November 26, 1998; that BOL then requested Ofelia B. Santos to surrender and deliver the duplicates of the titles covering the aforementioned properties; that Ofelia B. Santos refused to deliver the duplicates of the titles, thus, BOL filed a petition before the Regional Trial Court (RTC) of Bulacan, Branch 8, Third Judicial Region, Malolos, Bulacan, for the surrender and delivery of the duplicates of the above-mentioned titles to the Registry of Deeds of the Province of Bulacan; that after a prolong legal battle, BOL finally secured a favorable decision on May 7, 2002; that the said decision was appealed to the Court of Appeals which appeal was dismissed for lack of merit in a judgment dated November 21, 2003; that on July 23, 2004, the RTC of Bulacan, upon petition by the BOL, issued an order to cause the issuance of a Writ of Execution for the enforcement of the decision of the court dated May 7, 2002; that on August 31, 2004, a Writ of Execution was issued ordering Ofelia B. Santos to surrender and deliver the duplicates of Transfer Certificates of Title (TCT) No. T-192310, T-192311 and T-192312 to the Register of Deeds of Meycauayan, Bulacan so that the Affidavit of Consolidation of Ownership of Properties be registered and new titles shall be issued in the name of the Republic of the Philippines. ACcDEa In reply, please be informed that the above judicial sale although it is in the nature of a force sale is still subject to taxation. Thus, in the case of a judicial sale both the capital gains and documentary stamp taxes are computed based on the highest or winning bid price. (Revenue Memorandum Order No. 41-91). In the instant case, BOL is considered as a statutory seller, representing the owner-debtor Ofelia B. Santos, so that BOL becomes liable to pay the capital gains tax due on such judicial sale based on the bid price in the auction sale. BOL, however, could get reimbursement or recovery of the capital gains tax payment, if the right of redemption is exercised by the debtor, which in the instant case would be impossible since the right of redemption had lapsed already, or when the property is sold to any party whatsoever. (BIR Ruling Nos. 101-89 and 118-91) Moreover, a Certificate Authorizing Registration (CAR) is required before said properties are transferred in the name of the Republic of the Philippines, pursuant to Section 58(E) of the Tax Code of 1997, as amended, which reads as follows: "No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner of Internal Revenue or his duly authorized representatives has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid." Furthermore, considering that the Certificate of Sale was issued on November 5, 1992, the rate prevailing thereon shall be used in the imposition of the capital gains tax and, likewise, on the documentary stamp tax imposed under then Section 196 of the Tax Code, as amended. 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. SCaEcD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group