Spouses Ferdinand D. de Guzman and Tantally V. de Guzman

December 23, 2009 BIR RULING [DA-(I-042) 845-09] 27 (D) (5); RR 2-98 & 6-2001; DA-195-2000; DA-301-2003; DA-306-07; DA-168-08; DA-(I-016) 196-08 Spouses Ferdinand D. de Guzman and Tantally V. de Guzman No. 16 Pitimini Street, Frisco, Quezon City Gentlemen : This refers to your letter dated November 24, 2009 requesting for a ruling on the tax consequence of the reconveyance of a parcel of land by Ayala Life Assurance Inc. ("ALAI" for brevity) in your favor pursuant to the court approved compromise agreement in Civil Case No. Q-03-50222, for the Annulment of Foreclosure Proceedings and other Loan Documents, Unilateral Imposition of Interest Rates, Penalties and Other Charges, Re-Computation and Damages which you filed against ALAI and as necessary parties: The Clerk of Court & Ex-Officio Sheriff, Regional Trial Court, Quezon City, and the Register of Deeds, Quezon City. The facts as represented are as follows: On August 27, 1996, you applied for a Real Estate Mortgage Loan with ALAI in the amount of P5,000,000.00, with your real estate property located in San Francisco Del Monte, Quezon City, covered by Transfer Certificate of Title (TCT) No. N-150179 of the Registry of Deeds for Quezon City, constituted as a security for such loan. However, on July 31, 1997, ALAI only approved the amount of P1,000,000.00. As a consequence to the reduction of the loan amount, an Amendment to Mortgage Loan Agreement was executed by ALAI. Allegedly, ALAI effected some changes in the agreement without prior notice and consent from you. Among the changes effected by ALAI are the following: (1) reduction of the term of the loan agreement to fifteen (15) years from the original term of twenty (20) years, and (2) increase in the interest rate to 28% from 16.50%. On December 21, 1998, you received a Notice of Approved Restructuring of Real Estate Mortgage Loan, where it is provided therein the following: "Amount of Loan : P6,746,506.40 Term : Twenty (20) years from the remaining term Re-pricing rate : 17.50% fixed for 3 years Fixing Period : Every three (3) years" The foregoing imposition of varying rates of interest had been consistently impugned by you by sending formal correspondence to ALAI. On October 15, 1999, ALAI informed you that the above loan account has been transferred to BPI Family Bank so all transactions involving the same shall be directed to the said bank. Consequently, letters impugning the changes made by ALAI to the loan agreement were likewise directed to BPI Family Bank. ALAI declared you in default and the obligation immediately due and demandable, and subsequently thereto, initiated foreclosure proceedings by requesting the Clerk of Court and Ex-Officio Sheriff, to cause the extra-judicial sale of the mortgaged property. EAHcCT On November 19, 2002, the subject property had been sold in a public auction where ALAI emerged as the sole and only bidder. Consequently, title to the subject real property was transferred in the name of ALAI under TCT No. 278463. ALAI filed a Petition for the Issuance of Writ of Possession over the subject real property. You, on the other hand, filed a case against ALAI and as necessary parties: The Clerk of Court & Ex-Officio Sheriff, Regional Trial Court, Quezon City, and the Register of Deeds, Quezon City, captioned as Civil Case No. Q-03-50222, for "Annulment of the Foreclosure Proceedings and other Loan Documents, Unilateral Imposition of Interest Rates, Penalties and Other Charges, Re-Computation and Damages". You and ALAI have agreed to a compromise settlement of your respective claims, hence, the decision of the court based on the compromise agreement which became final and executory on November 17, 2009. Under the terms of the Compromise Agreement, you and ALAI agreed, among others, for ALAI to reconvey in your favor the subject real property and for you to pay your loan obligations and to reimburse ALAI the real estate taxes it paid to the local government concerned. In reply, please be informed that in BIR Ruling No. DA-(I-016) 196-08 dated September 5, 2008, wherein the facts of the case involve the return of real properties to the owners of the same, without monetary consideration, by virtue of a court approved compromise settlement, this Office ruled that the said reconveyance is not subject to the capital gains and documentary stamp taxes 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, and Section 196 of the same Code respectively. Following the stand of this Office as laid down in the above ruling, the reconveyance by ALAI in your favor of the subject real property, without monetary consideration, therefore, is not subject to income tax and the capital gains tax imposed under Section 27 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 same Tax Code. Likewise, the said transfer of property is not subject to the documentary stamp tax imposed under Section 196 of the same Code. However, the notarial acknowledgment to the said deed of reconveyance is subject to the documentary stamp tax of P15.00 only pursuant to Section 188 of the Tax Code of 1997, as amended. 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. IcHTAa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service