Nitorreda, Nasser & Layusa

October 2, 2008 BIR RULING [DA-(I-026) 271-08] BIR Ruling No. 59-92 Nitorreda, Nasser & Layusa Suite 211, Doa Margarita Bldg. J.P. Rizal corner Cardona Sts. Makati City Attention: Atty. Ernesto P. Layusa Gentlemen : This refers to your letters dated January 22, 2007 and July 1, 2008 requesting for a refund of capital gains and documentary stamp taxes in the amount of PhP105,000.00 and PhP31,500.00 or a total of PhP136,500.00 paid by your clients, Ted and Catherine Co on the transfer of property in view of the decision of the Regional Trial Court declaring void the Deed of Absolute Sale with Right to Redeem Foreclosed Property. ASIETa As represented, Spouses Anton and Lilibeth Natividad (debtors) questioned, before the Regional Trial Court (RTC), Branch 272, Marikina City docketed as Civil Case No. 97-333-MK, the transfer of their property in favor of Spouses Co (creditors). This stemmed from a contract of loan evidenced by a promissory note which was secured by a document denominated as "Deed of Absolute Sale with Right to Redeem Foreclosed Property", over a house and lot of Spouses Natividad, entered into by the parties on June 23, 1995 (first transaction) . When Spouses Natividad failed to pay the loan upon maturity, Spouses Co enforced the deed of sale and caused the title of the house and lot of Spouses Natividad to be transferred to their name. Spouses Co paid the capital gains and documentary stamp taxes thereon on June 21, 1995 and June 23, 1995, respectively. The transfer of title to the subject property, under the name of Spouses Co, before the one-year prescriptive period for Spouses Natividad to exercise their right of legal redemption was declared defective and, therefore, void by the trial court on February 29, 2000. The RTC ordered the cancellation of the TCT issued in the name of Spouses Co and directed that a new TCT be issued in the name of the true owners, Spouses Natividad upon payment by the debtors of their loan which shall include the interest agreed upon. In a Decision dated January 31, 2005 under case CA-G.R. CV No. 70818, the Court of Appeals affirmed the decision of the RTC subject to modifications and ordered Spouses Natividad to pay within 90 days from finality of its decision their loan plus 12% interest per annum counted from July 16, 1994, the date of execution of the promissory note, until full payment, and in case of failure of Spouses Natividad to pay within the aforesaid period, Spouses Co would then be entitled to foreclose on the mortgaged real estate property of Spouses Natividad and sell the same at public auction to the highest bidder, pursuant to Rule 39 of the Revised Rules of Court. On May 31, 2007, the subject property was sold at public auction to Spouses Co for the sum of PhP6,338,675.53 (second transaction) . Spouses Co now request that no capital gains and documentary stamp taxes be paid on this second transaction. In reply, please be informed that Sections 204 (C) and 229 of the National Internal Revenue Code of 1997, as amended provides as follows: "SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes . The Commissioner may xxx xxx xxx (C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund." "SEC. 229. Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any sum alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. SCHcaT In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefore, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation ( Commissioner of Internal Revenue vs. Ledesma, G.R. No. L-13509, January 30, 1970, 31 SCRA 95) and as such, they are looked upon with disfavor ( Western Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 121). The capital gains and documentary stamp taxes on the sale with right to redeem foreclosed property (first transaction) was paid on June 21, 1995 and June 23, 1995, respectively. Since the claim for refund has been filed beyond the 2-year period prescribed under Section 204 (C) in relation to Section 299 of the NIRC, as amended, Spouses Co are already barred from making such claim. cHATSI Moreover, Spouses Co cannot invoke the February 29, 2000 Order of the Regional Trial Court declaring void the transfer of title to the subject property, under their name after having paid the capital and documentary stamp taxes (when Spouses Natividad as transferors should have paid the same). The reason behind this is because Spouses Co showed utter disregard for the rule of law when without any justifiable reason they foreclosed the aforesaid property without notice to Spouses Natividad and before the one-year prescriptive period for them to exercise their right of legal redemption so that the party claiming oppression then becomes the oppressor of the orderly functions of the government. As the legal maxim goes, "he who comes to court must come with clean hands". Otherwise, he not only taints his name, but ridicules the very structure of established authority. Finally, the request of Spouses Co that no capital gains and documentary stamp taxes be paid on the second transaction as the aforesaid taxes were already paid during the first transaction is denied for lack of legal basis. The first and second transactions are two (2) separate and distinct transactions. Moreover, the tax base and tax rates used in the computation of the first transaction differ from that used in the second transaction, viz. : First Transaction Second Transaction (1995) (2008) Tax Base PhP2,100,000.00 PhP6,338,675.53 Capital Gains Tax rate 5% 6% Documentary Stamp Tax rate 1.5% 1.5% The sale at public auction (second transaction) is subject to capital gains and documentary stamp taxes based on the bid price or PhP6,338,675.53 computed at 6% and 1.5% rates, respectively. 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. SATDHE Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service