Atty. Franklin Noel P. Trazo

November 29, 2007 BIR RULING [DA-603-07] 24 (D) (1) #068-2000; DA-375-2004; DA-030-2004 Atty. Franklin Noel P. Trazo Block 11, Lot 7, Lapu-lapu Street New Capitol Estates I Commonwealth Ave., Quezon City S i r : This refers to your undated letter stating that your client, Rafael R. Pabelico, sold a house and lot in Cainta in year 2006 to Miguel C. Sedaria, Jr.; that Mr. Sedaria's Bank issued a Letter of Guaranty in his favor; that as a consequence of the sale, Mr. Sedaria caused the payment of capital gains and documentary stamp taxes to the BIR sometime in October 2006; that the title to the property was subsequently transferred to Mr. Sedaria under Transfer Certificate of Title No. 704758; that however, Mr. Sedaria's Bank drastically reduced his loan amount as it made a mistake in assessing the property; that as Mr. Sedaria could not cover the difference between the price of the property and the amount of the loan, the parties agreed to rescind the sale and reconvey the property to Mr. Pabelico subject to the refund of capital gains tax; and that in support of your request, you submitted copies of the following documents, namely: (1) Deed of Absolute Sale between Rafael R. Pabelico and Miguel C. Sedaria (2) Letter of Guaranty from RCBC Savings Bank (3) Capital Gains Tax Return (4) Certificate Authorizing Registration (5) Transfer Certificate of Title No. 704758 and (6) Deed of Reconveyance. Based on the foregoing, you now request for a clarification that the subsequent reconveyance of the house and lot in favor of Mr. Rafael R. Pabelico is not subject to the payment of Capital Gains Tax imposed under Section 24 (D) (1) of the Tax Code of 1997 and the documentary stamp tax imposed under Section 196 of the same Code. In reply, please be informed that in BIR Ruling No. DA-030-2004 dated January 16, 2004, the BIR ruled that: ". . . the transfer of titles of the lots by the developer to the buyers was done merely for the purpose of loan approval. Such conveyance did not produce any legal effect, since the developer failed to receive the consideration for the sale, hence it cannot be said that the properties have been properly disposed, transferred or conveyed by the developer in favor of the buyers, pursuant to Article 1352 of the Civil Code, stating: 'Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatsoever.' cTSHaE xxx xxx xxx Consequently, since the Deeds of Absolute Sale between Brixton and the buyers failed to effect the transfer of ownership of the properties for lack of consideration, the Deeds of Reconveyance executed by the buyers so as to effect the return of the subject properties to the developer are not subject to the capital gains and documentary stamp taxes prescribed in Section 24 (D)(1) and 196 of the Tax Code of 1997, respectively." In view of the foregoing, this Office rules and so holds that the Deed of Reconveyance executed by and between Miguel C. Sedaria, Jr. and Rafael R. Pabelico, covering the aforesaid house and lot covered by TCT No. 704758, for the purpose merely of restoring the parties to their previous status, as if no such Deed of Absolute Sale was executed are not subject to capital gains tax under Section 24 (D) (1) of the Tax Code of 1997, as amended, and to documentary stamp tax under Section 196 of the same Tax Code. (BIR Ruling Nos. 068-2000 dated December 14, 2000 and DA-375-2004 dated July 6, 2004) However, the same is subject to the documentary stamp tax of P15.00 as imposed by Section 188 of the Tax Code of 1997 on acknowledgments. (BIR Ruling No. 042-97 dated April 8, 1997 ) 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. cIETHa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service