Intercity Home Subdivision

August 7, 2009 BIR RULING [DA-(I-026) 448-09] 24 (D) (1); DA-229-99; DA-146-02 Intercity Home Subdivision Barangay Cupang, Alabang, Muntinlupa City Attention: Mr. Mariano F. Madrigal Mr. Romeo Aguillon Mr. Emmanuel Coraza Gentlemen : This refers to your letter dated February 26, 2009 requesting for confirmation of the opinion that the transfer of the particular real properties pursuant to the Trial Court's Decision on the Compromise Agreement dated June 14, 2007 in Civil Case No. 96-142 is exempt from payment of capital gains tax (CGT) and documentary stamp tax (DST). It is represented that on December 1990, spouses Gloria and Rey Concepcion ("Sps. Concepcion") sold to spouses Mariano and Julieta Madrigal ("Sps. Madrigal") a property containing an area of 151 square meters covered by Transfer Certificate of Title (TCT) No. 145071; that TCT No. 174536 of the Registry of Deeds of Makati was subsequently issued in the name of Mariano F. Madrigal; that on September 1991, a certain Joseph Aquino informed Sps. Madrigal that he is the owner of the lot now being occupied by the latter and so he filed a case for recovery of possession against said couple; that the Regional Trial Court (RTC) of Makati ruled in favor of Joseph Aquino; that on July 1996, Sps. Madrigal filed a case for damages against Sps. Concepcion and the developer of the property, Intercity Properties, Inc. before Branch 256 of the RTC Muntinlupa City (Civil Case No. 96-142) for selling the wrong property to them; that on April 2001, Muntinlupa City RTC-Branch 256 ordered a relocation and verification survey to be conducted; that upon survey of Engr. Rodrigo D. Marcelo, the findings as reported were as follows: "3.1 That Lot 5-B , Psd-04-003182, containing an area of 151 sq.m. covered by Transfer Certificate of Title No. 174536, is registered in the name of Mariano F. Madrigal married to Julieta S. Madrigal; 3.2 That Lot 5-A , Psd-04-003182, containing an area of 150 sq.m. covered by Transfer Certificate of Title No. 152633, is registered in the name of Joseph Aquino married to Josefina B. Aquino; 3.3 That the existing house/building together with all the improvements of spouses Mariano F. Madrigal and Julieta S. Madrigal, instead of being erected on Lot 5-B , Psd-04-003182, covered by Transfer Certificate of Title No. 174536, which they rightfully owned, was erroneously constructed on Lot 5-A , Psd-04-003182, covered by Transfer Certificate of Title No. 152633, the true owners of which are spouses Joseph Aquino and Josefina B. Aquino; and 3.4 That on the other hand, on Lot 5-B , Psd-04-003182, covered by Transfer Certificate of Title No. 174536, whose real owners are Mariano F. Madrigal and Julieta S. Madrigal, was actually occupied by the house of spouses Romeo Aguillon and Asuncion C. Aguillon, who are owners of Lot 6-A and Lot 6-B , both plan Psd-04-003182, covered by Transfer Certificate of Title No. 120608 and 120609, respectively." (Emphasis supplied) that the lot under the name of Sps. Aguillon (TCT No. 120609) is being occupied by one Emmanuel Coraza and that the lot under the name of Emmanuel Coraza (TCT No. 140229) is vacant; that on May 9, 2007, concerned parties appeared before Muntinlupa City RTC-Branch 256 and executed a Compromise Agreement (for Civil Case No. 96-142) to put an end to the lengthy litigation process; that in said Agreement, it was agreed that the parties were transferring the properties under their respective names to the actual occupants therein, particularly: AIaSTE "1. For the settlement of the case at bar, the ownership of Lot 5-B, PSD-04-003182, covered by TCT No. 174536 containing an area of one hundred fifty one (151) square meters, whose registered owners are the plaintiffs (Sps. Madrigal), shall be transferred and conveyed to spouses Romeo Aguillon and Asuncion O. Aguillon. 2. On the other hand, the ownership of Lot 6-B, Psd-04-003182, covered by TCT No. 120609 containing an area of one hundred fifty six (156) square meters, whose registered owners are the spouses Romeo Aguillon and Asuncion O. Aguillon, shall be transferred and conveyed to Emmanuel Coraza. 3. The ownership of a parcel of land covered by TCT No. 140229 containing an area of eighty one (81) square meters, whose registered owner is Emmanuel Coraza, shall be transferred and conveyed in favor of the plaintiffs spouses Mariano Madrigal and Julieta Madrigal. 4. As financial assistance for the plaintiffs who shall re-construct their home on a vacant lot a much smaller area than the one they originally purchased, Spouses Gloria Concepcion and Rey Concepcion agree to give the plaintiffs the sum of Php10,000 each." that the Compromise Agreement was approved by the RTC in its Decision dated June 14, 2007; that a Certificate of Finality dated November 22, 2007 was issued by the RTC; and that the parties are now in the process of transferring their respective titles pursuant to the Compromise Agreement. In reply, please be informed that there will be a three (3)-way exchange of properties per Decision on the Compromise Agreement, to wit: 1. The lot of spouses Madrigal will be transferred to the spouses Aguillon; 2. The lot of the spouses Aguillon will be transferred to Emmanuel Coraza; and 3. The lot of Emmanuel Coraza will be transferred to the spouses Madrigal. The issue is whether or not capital gains and documentary stamp taxes are due on these transfers. Under Section 24 (D) (1) of the Tax Code of 1997, capital gains is 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 the fair market value as determined in accordance with Section 6 (E) of the Code, whichever is higher. This Office, in BIR Ruling No. DA-229-99 dated April 13, 1999, ruled that exchanges of real property to correct a mistake/error without consideration is exempt from capital gains tax imposed under then Section 24 (D) (1) of the Tax Code of 1997 and to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended, to wit: ". . . the execution of the Memorandum of Agreement and Deed of Reconveyance designed to correct the series of mistakes/errors abovementioned without consideration and not to sell, exchange or otherwise dispose of real properties for the purpose of conveying title to the purchasers for a consideration is not subject to the capital gains tax imposed under then Section 24(D)(1) of the Tax Code of 1997 and to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended (now also Section 196 of the Tax Code of 1997) since its execution is merely a formality being undertaken to place the rightful owners thereof to their respective real property which was triggered when Mr. Diamante and Mr. Anyayahan inadvertently constructed their respective houses on Lot 5 owned by Cynthia Pet who likewise constructed her house on Lot 6 owned by Mariano Umali, Quirino Tan and Salvador Tan who in turn constructed their houses in Lot 7. However, the notarial acknowledgment on the Deed to be executed is subject to the documentary stamp tax of P15.00 under Section 188 of the Tax Code, as amended (now also Section 188 of the Tax Code of 1997). Accordingly, your opinion to this effect is hereby confirmed (BIR Ruling No. 178-94 dated December 14, 1994)." In BIR Ruling No. DA-146-02 dated September 03, 2002, the BIR had occasion to rule on a case where the area of property transferred was bigger than what was received in exchange, thus "In reply, please be informed that since the exchange transaction is without any monetary consideration, and considering further that the execution of the Deed of Exchange is merely to correct a mistake, this Office is of the opinion as it hereby holds that the above-stated exchange of realties by and between the aforesaid parties is not subject to the capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the same Tax Code. However, the fair market value of 58 sq.m. which is the difference in the area received by Noelito V. Barrios being transferred by Rogelio O. Megino is subject to the capital gains tax pursuant to Section 24(D)(1) of the same Tax Code, which provides that a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the same Code, whichever is higher, is hereby imposed upon 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 trust. DTAESI Moreover, pursuant to Section 196 likewise of the same Code, the aforestated value of 58 sq.m. is subject to the 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. Moreover, the notarial acknowledgment to the aforesaid Deed of Exchanges is subject to the documentary stamp tax of P15.00 only pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-335-1998 dated July 21, 1998)" In this case, the transfers were apparently intended to remedy the mistakes, since it is impractical to physically transfer the houses to the proper lots, and hence, the transfer of the lots may be exempt from capital gains and documentary stamp tax. However, the value of the difference between the area of the lot transferred and the lot to be received will be subject to said taxes. Based on the foregoing, we rule as follows: 1. On the transfer from the Madrigal spouses to Aguillon spouses: The lot (TCT 174536) of the Madrigal spouses has an area of 151 sq.m., which will be transferred to the Aguillon spouses. In exchange, the Madrigal spouses will only acquire/receive Emmanuel Coraza's lot (TCT 140229) with an area of 81 sq.m. only. As a result, there is a difference of 70 sq.m. and this will be subject to capital gains and documentary stamp taxes since the value of the property transferred is more than the value of the property received in exchange, which presumes that a gain has been realized from the disposition of the real property on the part of the transferor, the Madrigal spouses. Furthermore, considering that an amount of P20,000.00 will be received by the Madrigal spouses under the Compromise Agreement as financial assistance from the Concepcion spouses, this will be subject to income tax. 2. On the transfer from Aguillon spouses to Emmanuel Coraza: The Aguillon spouses' lot (TCT 120609) measures 156 sq.m., which will be transferred to Emmanuel Coraza. In exchange, the Aguillon spouses will only acquire/receive the Madrigal spouses' lot (TCT 174536) with an area of 151 sq.m. only. As a result, there is a difference of 5 sq.m. and this will be subject to capital gains and documentary stamp taxes since the value of the property transferred is more than the value of the property received in exchange, which presumes that a gain has been realized from the disposition of the real property on the part of the transferor, the Aguillon spouses. 3. On the transfer of Emmanuel Coraza's lot to the Madrigal spouses: Emmanuel Coraza's lot (TCT 140229) has an area of 81 sq.m. this will be transferred to the Madrigal spouses. In exchange, Emmanuel Coraza will acquire/receive the Aguillon spouses' lot (TCT 120609) which is 156 sq.m. As a result, there is a difference of 75 sq.m. which is exempt from capital gains tax and documentary stamp tax since the value of the property transferred is less than the value of the property received in exchange and thus, no gain has been realized from the disposition of the real property on the part of the transferor, Emmanuel Coraza. 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 as represented are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service