Ms. Josefina S. Lubrica

November 19, 2008 BIR RULING [DA-(I-036) 443-08] Section 66, R.A. 6657; Sec. 24 (c), R.A. 8424 Ms. Josefina S. Lubrica C/o Sanidad Law Office 2/F Eastside Buildings #77 Malakas St., Brgy. Pinyahan Quezon City Gentlemen : This refers to your letter dated November 12, 2008, seeking opinion on the tax consequence of the transfer of Meralco Shares to Josefina S. Lubrica, the Assignee of Federico Suntay as a consequence of a public auction in connection with the payment of just compensation to the landowner made under Republic Act No. 6657, otherwise known as the "Comprehensive Agrarian Reform Law of 1988". HSIDTE Documents submitted disclosed that Sps. Federico & Cristina Suntay are the registered owners of a parcel of land located at Sablayan, Occidental Mindoro, covered by TCT No. T-31 (T-1326) of the Register of Deeds of Mamburao, Occidental Mindoro, consisting of 3,682.0285 hectares; that upon the implementation of Presidential Decree (P.D.) No. 27 on October 21, 1972, the above-described property was placed under the operation of the Operation Land Transfer (OLT) program of the government through the Department of Agrarian Reform (DAR) Region IV; that the DAR and the Land Bank of the Philippines (LBP) valued the 948.1911 hectare portion of the property at P4,497.50 per hectare; that the landowner disagreed with the said valuation for being manifestly contrary to pertinent laws and regulations on just compensation, and for being unconscionably low which tantamount to a taking of property without due process of law; that in the decision of the Department of Agrarian Reform Adjudication Board (DARAB) of the DAR, the award for just compensation was raised to P157,541,951.30 for the 948.1911 hectares and LBP was directed to effect the immediate payment of the said amount to the registered landowner; that LBP filed a Motion for Reconsideration of said DARAB's decision, however, it was filed out of time, beyond the 15 day reglementary period; that a Writ of Execution was issued by the DARAB upon the respondent and judgment obligor LBP for the purpose of enforcing and satisfying the decision and to promptly deliver to the judgment obligee the judgment award; that apparently, LBP can not pay the judgment award in cash, thus the DARAB Sheriff attached the Meralco Shares listed under LBP's name at the Philippine Depository and Trust Co. (PDTC); that present in the Auction Sale was Mr. Roberto Bacsal and Josefina S. Lubrica; that Mr. Bacsal was declared as the highest bidder, however, his Allied Bank Check in support of his bid was refused by Josefina S. Lubrica because it was a personal check and not a Manager's or Cashier's Check; that after which, Mr. Bacsal withdrew his bid and his check; that at this juncture, Josefina S. Lubrica, as judgment creditor, entered her own bid for Meralco shares and there being no other bid, her bid was accepted; that you believe that the acquisition of the shares of stocks which constitute payment of just compensation should be exempt from payment of capital gains tax, inasmuch as the said acquisition is a necessary consequence of the execution of a judgment under the Comprehensive Agrarian Reform Program (CARP) of the government pursuant to Section 66 of R.A. 6657. In reply, please be informed that your reliance with Section 66 of R.A. 6657, otherwise known as the "Comprehensive Agrarian Reform Law of 1988", is misplaced to quote: Sec. 66. Exemption from Taxes and Fees of Land Transfers . Transaction under this Act involving a transfer of ownership, whether from natural or juridical persons, shall be exempted from taxes arising from capital gains. These transactions shall also be exempted from the payment of registration fees and all other taxes and fees for the conveyance or transfer thereof: Provided, . . . . That above-quoted provision contemplates a situation where a land subject of P.D. 27 is transferred whether from natural or juridical persons, said transfer is exempt from taxes. However, in the instant case, it speaks of the payment to the landowner of the just compensation of a parcel of land subjected to CARP Law. It appeared in the instant case, that LBP was not able to comply with the decision of the DARAB, to effect the immediate payment of the just compensation to the landowner. Thus, as owner of Meralco shares which are deposited at the PDTC, its shares were attached by the DARAB Sheriff and were sold at Public Auction. The judgment creditor being the highest, bidder, was awarded the shares. The transfer of the shares to the judgment creditor is subject to capital gains tax since LBP is transferring/selling, in a sense, its assets in the form of Meralco shares to the highest bidder, which incidentally, is the judgment creditor herself. The proceeds of the auction sale shall be applied in partial satisfaction of the judgment award, and since it is the judgment creditor, the highest bidder, her bid shall be credited against her judgment award. The attachment of the Meralco shares did not automatically satisfy the judgment award. It is not a case of pactum commisarium, where the seized shares must be sold at public auction, that in case there is a qualified bidder, the highest bid price must be applied to the judgment award. In the instant case, there are two (2) transactions involved: 1) the award of the just compensation to the judgment creditor; and 2) the award of the highest bidder to the judgment creditor. The award of the highest bidder to the judgment creditor does not necessarily mean the satisfaction of the judgment award despite the fact that she herself is the judgment creditor. Since LBP is owner and statutory seller of the assets seized by the DARAB Sheriff, the sale of the Meralco shares is subject to capital gains tax under Section 24 (C) of the Tax Code of 1997, as amended, to quote: Sec. 24. Income Tax Rates. xxx xxx xxx "(C) Capital Gains from Sale of Shares of Stocks not Traded in the Stock Exchange. The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. aTAEHc "Not over P100,000 5% "On any amount in excess of P100,000 10%" However, Section 98 of Republic Act (R.A.) 3844, otherwise known as "An Act To Ordain the Agricultural Land Reform Code and to Institute Land Reforms in the Philippines", provides, to quote: Section 98. Tax Exemption. The operations as well as holding, equipment, property, income and earnings of the Bank from whatever sources shall be fully exempt from taxation. Accordingly, in view of the afore-quoted provision of R.A. 3844, LBP is exempt from the payment of capital gains tax in its transfer of the Meralco shares to the assignee, Josefina S. Lubrica. Corollarily, in BIR Ruling No. DA-030-02 dated March 7, 2002, it was ruled that transactions involving transfer of ownership of land covered by CARP are exempt from capital gains tax and also from other taxes. (BIR Ruling No. DA-095-98 dated March 19, 1998). In other words, the proceeds to be derived by the landowner from the sale of the land covered by CARP is exempt from capital gains tax imposed under Section 196 of the Tax Code of 1997. . . . . Conversely, the receipt of the total judgment award by the assignee, Josefina S. Lubrica pursuant to the aforesaid transaction is exempt from taxes. 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. aEHADT Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service