Muntuerto Fernan Miel Cavada & Duyongco Law Offices

July 8, 2008 BIR RULING [DA-(I-001) 010-08] 27 (D) (5); 57 (B); 196; DA-301-2003; DA-195-2000 Muntuerto Fernan Miel Cavada & Duyongco Law Offices Suite 706, Ayala Life-FGU Center Cebu Business Park, Cebu City Attention: Atty. Mario Y. Cavada Gentlemen : This is refers to your letter dated March 7, 2008 requesting on behalf of your clients, Sps. Antonio and Sally Rufina de las Peas, Jose Enrique de las Peas, Glenn Mark Anthony de las Peas and Antonio II de las Peas for an exemption from the payment of capital gains tax, documentary stamp tax and income tax on the reconveyance by the Development Bank of the Philippines (DBP) of its real properties to the afore-named individuals pursuant to a compromise agreement to be submitted for approval by the Court in the case of " Sps. Antonio and Sally de las Peas, Jose Enrique de las Peas, Glenn Mark Anthony de las Peas and Antonio II de las Peas, Plaintiffs, versus Development Bank of the Philippines (DBP), et al., Defendants " in Civil Case No. 28296 before the Regional Trial Court (RTC)-Branch 12, 7th Judicial Region, Cebu City. cATDIH The facts and circumstances antecedent to said case, are as follows: On January 27, 1995 and March 29, 1996, DBP granted in favor of Spouses de las Peas credit lines in the aggregate amount of P5,500,000.00 secured by three (3) contiguous lots located in Lawaan, Talisay City, Cebu, then covered by Transfer Certificates of Title Nos. (TCT) Nos. T-42094, T-42095 and T-42096 (now TCT Nos. T-133706, T-133707 and T-133708 consolidated in the name of defendant DBP) and a residential lot with improvements thereon under TCT No. 117594 located in Cebu City. Unfortunately, Spouses de las Peas were unable to pay the amortization of their loan and as a result thereof the defendant DBP foreclosed the mortgage constituted over plaintiffs' properties covered by TCT Nos. T-42094, T-42095, T42096 and 117594 which were sold at public auction on November 16, 2000 in favor of defendant DBP as the highest bidder. Apparently, due to fatal irregularities in the extra-judicial foreclosure proceedings which would make it null and void, and which as a result would not pass any right or ownership over the properties to defendant DBP, the Spouses and their children on March 6, 2002 have decided to file a case against DBP and Nilo Galorport in his capacity as Special Sheriff for "Declaration of Nullity of Auction Sale, Certificate of Sale, Accounting, Damages, Injunction with prayer for Temporary Restraining Order and Writ of Preliminary Injunction". During the pre-trial conference of the aforesaid case, and upon the judicious prodding of the Court to resolve the matter, parties agreed to settle plaintiffs' loan obligations with DBP in the amount of Fifteen Million Four Hundred Seventy Five Thousand Four Hundred Seventy Five Pesos (P15,475,475.00). The terms and conditions of the said compromise have been concurred by the herein parties subject to the approval of the Court, and portions of which are stated as follows: 1. Upon the approval of the compromise by the Honorable Court, the plaintiffs agree that their deposits with the defendant bank shall be applied as payment of plaintiffs' compromise loan obligation with DBP in the amount of P15,475,475.00, and any balance of the deposits shall be delivered by the defendant DBP to the plaintiffs. ScaEIT 2. After the plaintiffs' payment of their said loan obligation, the DBP shall reconvey the properties covered by TCT Nos. T-133706, T-133707, T-133708 and T-117594 by way of a Deed of Reconveyance without any payment or consideration, and deliver to the plaintiffs TCT Nos. T-133706, T-133707, T-133708 and T-117594. 3. Realty taxes, transfer costs, registration fees, documentary stamp taxes, withholding taxes and other taxes/expenses, if any, incidental for the transfer of the property in the names of the plaintiffs in the corresponding Transfer Certificates of Title shall be borne by the plaintiffs. Back taxes, if any, shall be for the account of the plaintiffs. 4. All claims, liens, assessments, liabilities and/or damages whatsoever, arising from any suit or litigation involving the Properties from the date of signing of this Compromise Agreement shall solely be assumed by the plaintiffs to the total exclusion of DBP. 5. Plaintiffs shall be responsible at their own expense for the ejectment of squatters, tenants and/or occupants, if any, on the properties subject of the compromise. 6. Plaintiffs shall hold DBP free and harmless from any claim or liability from any person or persons which may arise from the compromise settlement. AaSIET 7. Plaintiffs' failure to comply with any of the above-mentioned conditions shall give rise to the following: (a) DBP will be authorized to file and request the Honorable Court to issue a writ of execution to satisfy the plaintiffs' unpaid obligation. (b) Plaintiffs will recognize the validity of foreclosure undertaken by DBP on November 16, 2000. 8. The parties will consider the Compromise Agreement as full, final and complete settlement/adjudication of plaintiffs' loan obligation with DBP and of their respective claims and counterclaims and parties will waive or quitclaim any and all causes of action against each other in connection with the instant case. 9. The parties herein shall submit said agreement for the approval of the court and move for judgment based on such compromise. 10. If for any reason, the Compromise Agreement is not approved by the court, it shall be considered as ineffective as if it was not written and executed by the parties. ITScHa It is your view that inasmuch as time is of the essence in transferring back the properties to the plaintiffs, as well as the cancellation of the Certificate of Sale relative to the aforesaid auction sale and the cancellation of the real estate mortgage annotation in favor of DBP in the said titles, the plaintiffs in anticipation of the Court's approval of the said compromise agreement, are constrained to submit this request. Nevertheless, the transfer was effected merely for the purpose of restoring the ownership of Sps. de las Peas over the subject properties in accordance with the above-stated Court Judgment based on the Compromise Agreement. In reply, please be informed that in BIR Ruling No. 301-2003 dated September 15, 2003 citing BIR Ruling No. DA-195-2000 dated March 30, 2000 involving the transfer of a parcel of land by way of legal redemption, the BIR ruled as follows: ". . . please be informed that since the transfer of the subject property is in consonance with the decision of the Court of Appeals and is without consideration, the transfer of the said property in your favor 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. xxx xxx xxx In both rulings, this Office ruled that the deed of conveyance is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, because there is no monetary consideration in the subject transfer. However, the notarial acknowledgment to the deed of conveyance is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the (Tax) Code of 1997. (BIR Ruling No. 027-93 dated January 15, 1993, BIR Ruling No. 115-94 dated July 1, 1994)" SCaDAE In view of the foregoing, this Office hereby rules that the Deed of Reconveyance executed by DBP in favor of Sps. Antonio and Sally Rufina de las Peas, Jose Enrique de las Peas, Glenn Mark Anthony de las Peas and Antonio II de las Peas to effect the court approved compromise agreement, giving the spouses the right to redeem their properties is not subject to the capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997, as amended, nor to the creditable withholding tax prescribed by Revenue Regulations No. 2-98, as amended, implementing Section 57 (B) of the Tax Code of 1997, as amended. Likewise, the said Deed is not subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, as amended. However, the notarial acknowledgment to the Deed of Reconveyance 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 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