Dario Yu Viado and Hocson Law Firm

November 13, 2007 BIR RULING [DA-591-07] 24 (D) (1), 196 DA-210-01 Dario Yu Viado and Hocson Law Firm 902-A West Tower, Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Atty. Reynaldo A. Dario Gentlemen : This refers to your letter dated September 11, 2007 requesting on behalf of your client, Conrado Constantino V. De Jesus, Jr., for a ruling that no income/withholding tax, capital gains tax, documentary stamp tax and donor's tax will result from the rescission of a contract of sale of a condominium unit. It is represented that Swire Realty Development Corporation (Swire for brevity) is the owner-developer of a condominium project located at N. Domingo St., Quezon City. On July 23, 1997, Swire and your client, hereinafter referred to as "De Jesus" executed a Deed of Absolute Sale under which the former sold, transferred, conveyed and assigned to the latter a condominium unit particularly Unit No. 1504 (Tower I) for and in consideration of the amount of Five Million Two Hundred Twenty Four Thousand Six Hundred Thirty One and 21/100 (P5,224,631.21). As a consequence of the sale, the aforestated unit was registered in the name of De Jesus under Condominium Certificate of Title (CCT) No. N-18257 issued by the Registry of Deeds for Quezon City. De Jesus allowed his mother, Leny, to live in said apartment, however, her mother found it extremely difficult and dangerous to live in the same, in view of the numerous times the elevator would malfunction, particularly there was a time when her mother was in the elevator that the same descended at such a fast speed that she thought the cable had broken. In the fast descent, Leny was almost certain she would suffer serious injury but luckily the elevator slowed down and she was able to alight therefrom without any harm. Because of the defects in the construction of the building where the unit was located, principally the elevator, De Jesus demanded that Swire make the necessary repairs on the building and the elevator. However, the repairs made by Swire made little difference, if any, on the safety of the elevators. Despite numerous demands by De Jesus to make satisfactory repairs and/or replacements, no such repairs or replacements were made. This placed the parties at odds over a prolonged period of time. The parties agreed to avoid any legal dispute, and in lieu thereof, assented to the rescission of a contract of sale in 2000 and Leny soon thereafter moved out of the unit. However, notwithstanding their agreement, the parties could not agree on the tenor of the Deed of Rescission. On one hand, Swire refused to admit fault in the construction of the building and elevator. On the other hand, De Jesus insisted that clauses to that effect be specified in the Deed of Rescission. aEHASI After years of dispute and the near filing of suits and countersuits, the Parties finally executed a Deed of Rescission on January 18, 2007, where they agreed to rescind and render void their respective stipulations and covenants contained in the aforementioned Deed of Absolute Sale. Further to the rescission, the Parties returned to each other what they had reciprocally received under the transaction, i.e, the amount of P5,224,631.21 representing the purchase price for the unit, and title and possession to the same represented by CCT No. N-18257. Other than mutual restitution, no monetary consideration was involved in their transaction. In reply thereto, please be informed that Article 1191 of the Civil Code of the Philippines provides that the power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and rescission of the obligation with the payment of damages, in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. Corollarily, Article 1385 of the same Code provides that the rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest, consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. In applying the above-cited articles to the case in point, both Swire and De Jesus have mutually agreed to rescind the subject Deed of Absolute Sale involving a condominium unit for irreconcilable differences on the condition of the subject unit and the defective elevators of the condominium project. Thus, the rescission gives Swire the right to rescind and render null and void the stipulation in the aforementioned Deed of Absolute Sale, as the effect of rescission is, as if no sale, transfer or exchange ever took place between the parties. Similarly situated is BIR Ruling No. DA-210-01 dated October 19, 2001, where this Office ruled that: ". . . the Deed of Rescission and Reconveyance was executed in order to effect the cancellation of the sale and is without monetary consideration, the transfer of the said property in favor of CMJ is not subject to the capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997 nor to the creditable withholding tax prescribed by Revenue Regulations No. 2-98, implementing Section 57(B) of the Tax Code of 1997. Furthermore, it is not likewise subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. However, the notarial acknowledgement to the said Deed of Rescission and Reconveyance is subject to the documentary stamp tax of P15.00 only pursuant to Section 188 of the Tax Code of 1997." In view thereof, this Office holds that since the effect of the rescission between Swire and De Jesus is to cancel the Deed of Absolute Sale for failure on the part of the former to comply with the terms and conditions stated therein, the transfer of the condominium unit by De Jesus to Swire by virtue of a Deed of Rescission and without any monetary consideration involved is not subject to capital gains tax and the corresponding documentary stamp tax. It is to be noted that the foregoing transaction is not subject to gift tax as there is no intention to donate on the part of De Jesus. Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor, (2) the increase in the patrimony of the donee; and (3) the intent to do an act of liberality ( animus donandi ). ICTaEH Clearly, there is no intention on the part of De Jesus to donate the foregoing property to Swire, neither does the latter has the objective of giving a sum of money to De Jesus, since their transaction is effected solely for purposes of restitution. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service