Kalaw Sy Selva & Campos

September 2, 2009 BIR RULING [DA-(C-190) 484-09] Sec. 24 (D); DA-346-00 Kalaw Sy Selva & Campos Attorneys and Counselors-at-Law West Tower 2106A Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Shennan A. Sy Gentlemen : This refers to your letter dated May 28, 2009, requesting for confirmation that the partition and exchange of real properties among heirs, without monetary consideration and only for purposes of partitioning and getting their respective shares in the estate of their parents, is exempt from the payment of capital gains tax and documentary stamp tax. The factual antecedent of the case are as follows: Upon the demise of spouses Apolonio M. Lirio on February 07, 1998 and Teofista E. Lirio on November 23, 1998, the compulsory heirs and successors-in-interest of the deceased who are your clients, inherited the estate of their above-mentioned parents. These compulsory heirs and successors-in-interest are 1) Renato E. Lirio; 2) Francisco E. Lirio; 3) Luis E. Lirio; 4) Apolonio E. Lirio, Jr.; 5) Evangeline E. Lirio-Comia; 6) Audifacio E. Lirio; 7) Eleanor E. Lirio-de Lara; 8) Michael E. Lirio and 9) Victoria Dimaculangan-Malabanan. The estate consist of various real properties located in: 1) Poblacion, Tanauan City, Batangas; 2) Barangay San Isidro, Sto. Tomas, Batangas; and 3) Barangay Balete, Tanauan City, Batangas. On May 24, 1999, the compulsory heirs and successors-in-interest of the deceased executed a document or agreement entitled, "EXTRA-JUDICIAL SETTLEMENT" of the estate of the late APOLONIO M. LIRIO and TEOFISTA E. LIRIO. In the foregoing agreement, the compulsory heirs and successors-in-interest of the deceased agree to extra-judicially settle the estate of the deceased. They then adjudicated unto themselves the estate of the deceased as undivided and co-equal owners thereof. The above agreement also provides as list of the properties which constitute the estate of the deceased individuals. caHASI The estate tax and other taxes thereon were duly paid. Subsequently, the real properties, which constitute the estate of the deceased spouses Apolonio M. Lirio and Teofista E. Lirio, were registered in the names of the compulsory heirs and successors-in-interest of the deceased, as undivided and co-equal owners thereof since the compulsory heirs have not yet determined which specific properties will go to a particular heir. Thus, the registration of all the properties of the estate in the names of the compulsory heirs, as undivided and co-equal owners, is with the understanding that someday the compulsory heirs will partition the estate among themselves and the heirs will transfer ownership of the properties to the specific compulsory heirs, once the details of the partition has been determined. Accordingly, aside from specific property assigned to a compulsory heir, which is already in the name of the compulsory heir, all other properties in the name of such compulsory heir are being held in trust, by such compulsory heir, for the other compulsory heirs. On January 27, 2009, the compulsory heirs and successors-in-interest of the deceased executed a Memorandum of Agreement ("MOA") wherein they expressed their desire and agreed upon to divide the estate of the deceased in the manner agreed upon by the compulsory heirs. The MOA provides the mechanics and details on how the estate of the deceased will be divided and partitioned among the compulsory heirs. In the same MOA, the compulsory heirs admitted that they have an illegitimate sister on their paternal side. They conceded that they are holding a part of the estate of the deceased Apolonio M. Lirio for and in behalf of their illegitimate sister. As the share of the illegitimate sister in the estate of the deceased Apolonio M. Lirio, the compulsory heirs agreed to transfer to their illegitimate sister a parcel of land located in Barangay Balele, Tanauan City, Batangas. In order to fully implement the partition of the real properties which constitute the estate of the deceased spouses Apolonio M. Lirio and Teofisto E. Lirio, the compulsory heirs agreed to execute and enter the necessary agreements such as Declaration of Trust, Deed of Reconveyance and Deed of Exchange without monetary consideration. This was agreed upon only for the purpose of partitioning the real properties among the compulsory heirs who are the co-owners of such properties. In reply, please be informed that under Section 24 (D) of the Tax Code of 1997, capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts, shall be taxed at the rate of 6% based on the gross selling price or current fair market value as determined in accordance with Section 6 (E) of the same Tax Code, whichever is higher. DaAETS On the other hand, under Article 1082 of the Civil Code, every act which is intended to put an end to indivisions among co-heirs and legatees and devisees is deemed to be a partition, although it should purport to be a sale, an exchange, a compromise, or any other transaction. Moreover, under Article 1086 of the Civil Code, should a thing be indivisible, or would be much impaired by its being divided it may be adjudicated to one of the heirs, provided he shall pay the other the excess in cash. From the foregoing, it is clear therefore, that, in the instant case, your clients are not subject to the 6% capital gains tax imposed under the aforecited Section 24 (D) of the 1997 Tax Code, as amended, considering that there was neither a sale, exchange nor disposition of real property on their part but a partition of the estate of their parents wherein both of them agreed to indemnify each other if there is a difference in the value of the properties. Moreover, Section 196 of the Tax Code of 1997, as amended, provides that on all conveyances, deeds, instruments, or writings . . . any land or other realty sold shall be granted, assigned, transferred or otherwise conveyed to any other person designated, there shall be collected a documentary stamp tax based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of the same Code, whichever is higher. However, considering that the Deed of Partition was executed to put an end to the indivision among co-heirs and there is neither a sale, exchange nor disposition of real property on their part, the same deed is not subject to the documentary stamp tax imposed under the said section of the Tax Code. However, the aforesaid Deed is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Code. 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. cCHETI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service