BIR Ruling [DA-588-04]

November 22, 2004 BIR RULING [DA-588-04] Art. 1191 Civil Code; DA 099-03 Elly Lynn Ong 195 G. Araneta Avenue Quezon City M a d a m : This refers to your letter dated August 23, 2004 stating that on June 6, 1995, a Deed of Assignment was executed by and between Elly Lynn Ong, as the Transferor, and Five O Realty and Development Corporation, as the Transferee whereby the former transferred to the latter a Condominium Unit with a Basement Parking described as Unit 302 with a total area of 150.70 square meters of Crown Pointe Tower Condominium located at J. Abad Santos Street, Little Baguio, San Juan, Metro Manila in exchange for 30,000 shares with a par value of P100.00 per share or with an aggregate par value of P3,000,000.00; that on January 30, 2004, at the Special Meeting of the Board of Directors of Five O Realty and Development Corporation, it was unanimously approved that the parties agreed to reconvey to each other by way of Deed of Reconveyance the aforesaid property which they have previously exchanged with each other, since the Transferee corporation, Five O Realty and Development Corporation failed to operate for lack of funds, that on February 2, 2004, a Deed of Reconveyance was executed by Five O Realty and Development Corporation and Elly Lynn Ong, after the rescission of the Deed of Assignment on January 30, 2004, whereby the former agreed to reconvey the properties covered by CTC Nos. 5200-R and 5201-R to Elly Lynn Ong and the latter agreed to reconvey the 30,000 shares of stock to Five O Realty and Development Corporation. In connection therewith, you now request a ruling that the rescission of the Deed of Assignment in a tax-free transaction is not subject to capital gains tax and documentary stamp tax. In reply thereto, please be informed that rescission of a contract does not give rise to a taxable event for two reasons: (a) the result of rescission is that it is as if there was no sale, transfer or exchange, and hence, no income is realized; and (b) the return of the object of the rescinded contract is not for monetary consideration and is merely an acknowledgment or confirmation of the title and ownership of the original owner of the property. Thus, the surrender of the 30,000 shares of stock of Five O Realty and Development Corporation for the cancellation of the shares and the subsequent return of the condominium unit with its basement parking to Elly Lynn Ong is a necessary consequence of a rescission of the contract. In BIR Ruling No. 059-92 dated February 18, 1992, citing Article 1191 of the Civil Code on contract rescission, it was ruled that no gain shall be recognized on the return of the real property upon the rescission of a deed of absolute sale resorted to by the buyer due to the seller's non-compliance with his obligation to deliver the realty sold. It was likewise ruled that the deed of rescission shall not be subject to the documentary stamp tax, but to the P15.00 documentary stamp tax under Section 188 of the Tax Code of 1997. CaTcSA Accordingly, the reversion of the 30,000 shares of stock to Five O Realty and Development Corporation by Elly Lynn Ong and the subsequent return of the condominium unit with its basement parking to the latter is not taxable since it is a mere reconveyance of the object of the rescinded contract and is not for monetary consideration. Besides, Section 73 of the Tax Code of 1997 provides that only distributions made by a corporation to its shareholders out of its earnings or profits, whether in money or property are taxable. ( A. Soriano Corporation vs. Commissioner of Internal Revenue, CTA Case No. 3710, July 4, 1991, affirmed in Commissioner vs. A. Soriano Corporation and CTA, CA-G.R. SP No. 26017, January 15, 1993; Commissioner vs. Brown, CA (7) 69 Fd. 602 ) Under the aforesaid contract between Five O Realty and Development Corporation and Elly Lynn Ong, no corporate earnings or profits will be distributed by Five O Realty and Development Corporation. WHEREFORE, in view of the foregoing , neither Five O Realty and Development Corporation and Elly Lynn Ong will realize any taxable gain from the cancellation of the shares of stock and the return of the property. Both will not receive any net beneficial income nor realized gain which is required by the Tax Code for redemption of shares to be a taxable event. 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service