BIR Ruling [DA-601-04]

November 25, 2004 BIR RULING [DA-601-04] Zambrano & Gruba Law Offices 27th Floor, 88 Corporate Center Sedeo corner Valero Streets Salcedo Village Makati City Attention: Atty. Angelo Patrick F. Advincula and Atty. Edemiel M. Asilo Gentlemen : This refers to your letter dated September 24, 2004 stating that Spouses Bayani and Gracia Andal (Spouses Andal) were granted a loan by the Philippine National Bank (PNB); that as security for the repayment of the loan, Spouses Andal executed a real estate mortgage in favor of PNB; that when the debtor spouses failed to pay the loan in accordance with the terms of the loan agreement, PNB foreclosed on the real estate mortgage; that in the subsequent public auction that was conducted, PNB acquired the foreclosed property subject to the right of the Spouses Andal, their assigns and successor in interest to redeem the property from the Bank within the legal redemption period of one (1) year reckoned from December 12, 2000, the date of inscription of the Sheriff's Certificate of Sale with the Register of Deeds; that before the expiration of the one-year legal redemption period on December 12, 2001, the Spouses Andal offered to redeem the property; that on November 15, 2001, PNB approved the offer to redeem the property with the redemption price to be payable as follows: P700,000 downpayment (which is already in PNB's possession and which it has accepted) P2,000,000 payable on April 10, 2002 Balance to be amortized in five (5) years in equal monthly installments that the Spouses Andal were immediately informed by the Bank that the offer to redeem was approved; that because of PNB's extensive administrative loan processing and documentation requirements, the Agreement was only formally executed between PNB and the Spouses Andal on March 5, 2002; that subsequently, the Spouses Andal failed to pay the installments due in accordance with the payment schedule embodied in the Agreement; that pursuant to Section 4 of the Agreement, PNB declared the Spouses Andal in default, forfeited all installment payments, and cancelled the Agreement on August 16, 2003; that when PNB was in the process of consolidating its title to the property, the Revenue District Officer in Paraaque, BIR, verbally informed PNB that the property owner, Spouses Andal, must first pay the capital gains tax (CGT) and documentary stamp tax (DST) on the foreclosure sale (computed from January 12, 2002 or 30 days from the date of expiry of the one year redemption period); that the BIR also advised that it will charge penalty and interest on the said CGT and DST reckoned from January 2002 onwards; that since the Spouses Andal are not in a position to pay CGT and DST on the foreclosure sale, PNB has no other option but to shoulder the tax payments in order that it can eventually consolidate title to the property; that on the other hand, PNB's position is that the reckoning date for the payment of the CGT and DST is on August 16, 2003, the date when the Agreement was cancelled and the Spouses Andal lost their right to redeem the property; and that before this date, there was no taxable event as: AcICHD (a) the PNB and the Spouses Andal effectively extended the redemption period; (b) because of the extension, PNB cannot consolidate title; and (c) it was only when the Spouses Andal defaulted on the agreement did PNB again have a chance to consolidate title. Based on the foregoing representations, you now request for confirmation of your opinion that if an agreement to extend the redemption period in property foreclosure sale is valid, it has the effect of extending the due date for the payment of the CGT and DST. In reply thereto, please be informed that in Lazo vs. Republic Surety & Insurance Co., Inc. No. L-27365, January 30, 1970, the Supreme Court ruled that "As a rule, the one-year period of legal redemption begins to run from the date of recording of the sheriff's certificate of sale. But where by voluntary agreement of the parties, consisting of extensions of the redemption period granted at the request of the plaintiffs, followed by a commitment by plaintiffs to pay the redemption price at a fixed date, the concept of legal redemption is converted by the parties into one of conventional redemption such that it generated binding contracts when approved by the defendant. In such a case, the period of redemption is that agreed upon by the parties. It is clear, in the light of the facts and circumstances above set forth, that the parties had abandoned entirely the concept of legal redemption in this case and converted it into one of conventional redemption, in which the only governing factor was the agreement between them." Corollarily, in Ramirez vs. Court of Appeals, 219 SCRA 598, the same Court held that "By accepting the redemption price after the statutory period for redemption had expired, PNB is considered to have waived the one (1) year period within which Ramirez could redeem the property. There is nothing in the law which prevents such a waiver. Allowing a redemption after the lapse of the statutory period, when the buyer at the foreclosure does not object but even consents to the redemption, will uphold the policy of the law . . . . which is to aid rather than defeat the right of redemption. Thus, there is no doubt that the redemption made by petitioner Ramirez is valid." Considering that the above-cited cases are in all fours similar to the case at bar, meaning, PNB, prior to the lapse of the one-year legal redemption on December 12, 2001, had expressly agreed to extend the right of Spouses Andal to redeem the foreclosed property when: (a) it approved a redemption price payable by installment and lasting for a period beyond December 12, 2001; and (b) it immediately accepted the downpayment of P700,000.00 as partial payment of the redemption price. Thus, the due dates of filing and payment of taxes are imposable only when there arises a taxable event in which the particular tax should be imposed. In the instant case, the taxable consequences due on the foreclosure sale arise only after the Agreement was cancelled on August 16, 2003, i.e., when Spouses Andal lost their right to redeem the foreclosed property. ITSacC SUCH BEING THE CASE, this Office hereby confirms your opinion that the reckoning date for the payment of CGT and DST on the aforesaid foreclosure sale is on August 16, 2003, the date of cancellation of the Agreement. Consequently, the timely payment of the CGT and DST within the reglementary period reckoned from August 16, 2003 shall not be subject to penalties and/or interest. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group