Angara Abello Concepcion Regala & Cruz Law Offices

December 18, 2007 BIR RULING [DA-662-07] Sec. 24 (D) (1) Sec. 196; BIR Ruling 090-99; BIR Ruling 530-88 Angara Abello Concepcion Regala & Cruz Law Offices ACCRA Building, 122 Gamboa St., Legaspi Village, Makati City Attention: Attys. Salvador L. Pea Alfredo Pablo S. Malvar and Vladimir S. Uy Gentlemen : This refers to your letter dated September 6, 2007 requesting on behalf of your clients, Spouses Bartolome and Zenaida Angeles ("Spouses Angeles"), for a ruling that the reconveyance of their property pursuant to the Decision of the Supreme Court in the case entitled "Luzon Development Bank v. Spouses Bartolome and Zenaida Angeles (GR No. 150393, July 31, 2006, 497 SCRA 264)" is exempt from capital gains tax and documentary stamp tax. cHCaIE It is represented that Spouses Angeles are the owners of a piece of property covered by Transfer Certificate of Title No. (4887214) 0708 ("subject property"); that in June 1983, Spouses Angeles obtained a P500,000.00 loan from the Luzon Development Bank ("Bank") secured by a mortgage over the Subject Property; that upon Spouses Angeles' default, the Bank caused the extra-judicial foreclosure of the mortgage on the Subject Property; that during the public auction in August 1984, the Bank emerged as the highest bidder and in due time was issued the sheriff's certificate of sale; that before the 1-year legal redemption period had expired, Spouses Angeles and the Bank entered into an agreement for the extension of the redemption period and the payment of the redemption price which was fixed at P871,182.78; that after accepting Spouses Angeles' partial payments of the stipulated redemption price, the Bank refused to accept Spouses Angeles' subsequent tenders of payment and proceeded to consolidate title over the subject property. It is further represented that in 1988, the Bank filed a petition for a writ of possession over the subject property with the Regional Trial Court of Pasig (Trial Court); that the Trial Court denied the Bank's petition and ruled that Spouses Angeles and the Bank had an agreement to extend the period for which Spouses Angeles may redeem the Subject Property; that on appeal, the Court of Appeals affirmed the Trial Court's ruling; that subsequently, the Bank filed its petition for review before the Supreme Court which petition was denied by the Court in its Decision dated July 31, 2006; and that in the dispositive portion of said Decision, the Supreme Court directed both the Bank and Spouses Angeles to comply with the provisions of their contract by ordering Spouses Angeles to pay the balance of the redemption price in the amount of Php346,182.78 within a period of 1 1/2 years from finality of the Decision and directing the Bank to accept (Spouses Angeles') payments and accordingly convey to them the title of the subject property upon full payment. CDAHIT It is finally represented that the Supreme Court's Decision became final and executory on November 27, 2006; and that to satisfy the Supreme Court's Decision, Spouses Angeles and the Bank will execute a Deed of Redemption over the subject property. It is your position that pursuant to the Supreme Court's Decision, the Bank's consolidation of title over the subject property was rendered ineffective; consequently, the reconveyance of the subject property by the Bank to Spouses Angeles and the resulting Deed of Redemption are not subject to capital gains tax and documentary stamp tax, respectively. In support of your request, you submitted the following documents: 1. Copy of the Supreme Court Decision; and 2. Copy of the Draft Deed of Redemption. In reply, please be informed that by virtue of the Supreme Court's Decision, the consolidation of title over the subject property was rendered ineffective. The mandate of the decision is, in effect, to extend the period within which Spouses Angeles shall settle their obligation and redeem the foreclosed property within the agreed redemption period. Accordingly, the reconveyance of the subject property to the true and rightful owners without consideration will not involve any actual sale or conveyance of ownership since legal title is merely restored to the owners of the property. Such being the case, the transaction is not subject to the capital gains tax under Section 27 (D) (5) of the 1997 Tax Code, as amended, and creditable withholding tax under Section 57 (B) of the same Tax Code as implemented by Revenue Regulations 2-98, as amended. AaSCTD Moreover, the resulting Deed of Redemption to be executed by Spouses Angeles and the Bank is not subject to documentary stamp tax imposed under Section 196 of the 1997 Tax Code which provides thus: "SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property . On all conveyances, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher: Provided, That when one of the contracting parties is the Government, the tax herein imposed shall be based on the actual consideration." In BIR Ruling No. 530-88 dated November 7, 1988, this Office had occasion to state that "the Deed of Redemption is not subject to the documentary stamp tax imposed under (Section 196) of the Tax Code since the transaction which is subject to the documentary stamp tax is the conveyance of real property to the purchaser. This is not so in redemption of real property which involves restoration of the property to the mortgagor-debtor from the purchaser." In view thereof, this Office hereby confirms your opinion that the Deed of Redemption between Spouses Angeles and the Bank is not subject to documentary stamp tax under Section 196 of the 1997 Tax Code. However, the notarial acknowledgment to the said Deed is subject to the documentary stamp tax of P15.00 only pursuant to Section 188 of the same Tax Code. This will authorize the Revenue District Officer of the revenue district where the subject property is located to issue the corresponding Tax Clearance Certificate/Certificate Authorizing Registration on the foregoing transaction without need of presentation of proof of payment of the capital gains tax/creditable withholding tax and documentary stamp tax. 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. ACSaHc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service