Taxability of Transfer of Title to Real Property by Virtue of a Deed of Quitclaim and Conveyance to Satisfy a Judgment Award

January 19, 2004 BIR RULING NO. 003-04 32 (A) (1); 24; 27 (D) (5); 196 000-00 Mr. Constantino U. Uclusin FS, 4/F, Legaspi Towers 200 Paseo de Roxas, Legaspi Village Makati, Metro Manila S i r : This refers to your letter dated March 5, 2001 requesting for a ruling on whether the transfer of title to a real property in your favor by virtue of a Deed of Quitclaim and Conveyance in Satisfaction of Judgment Award is exempt from the payment of capital gains tax, transfer tax, documentary stamp tax and other taxes. It is represented that you filed a case against United Resources Realty and Development Corporation (URRDC) for illegal dismissal; that a decision was rendered in your favor by the National Labor Relations Commission (NLRC) on November 12, 1998, which has become final and executory on September 9, 1999, awarding you the following: 1. Backwages and corresponding 13th month pay from June 1, 1997 up to the date of the decision computed in the total amount of P227,500.00; 2. The amount of P8,304.56, representing illegal deductions from salary and for unpaid salary; 3. The amount of P1,141.00, representing reimbursement of transportation, representation, legal and other incidental official expenses; 4. Proportionate 13th month pay from January to May 1997 in the amount of P5,000.00; and 5. Separation pay equivalent to one (1) month salary per year of service or fraction thereof from January 2, 1997 up to September 9, 1999 in the aggregate amount of P36,320.00; that the total judgment award amounts to P278,265.56; that out of said amount, only P9,664.07 has been paid by URRDC out of its deposits at Banco de Oro, SM, Cubao, garnished for the purpose of satisfying the above judgment award, thus, leaving the balance of P268,601.49; that in full satisfaction of the decision, URRDC gave you a parcel of subdivision lot with an area of 77 square meters valued at P217,500.00 and a cash equivalent of P51,101.49 that for purposes of transferring title to the lot in your name, on February 6, 2001 URRDC executed a Deed of Quitclaim and Conveyance in Satisfaction of Judgment Award conveying to you the said subdivision lot. SDTcAH In support of your request you submitted photocopies of the following documents: 1) Court Decision in your favor awarding you backwages and separation pay; and 2) Deed of Quitclaim and Conveyance in Satisfaction of Judgment Award conveying to you the subject real property. In reply, please be informed as follows: 1) Under Section 32(B)(6)(b) of the 1997 Tax Code, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of the said official or employee" in effect connotes involuntariness on the part of the official or employee . The separation from the service of the official or employee must not be of his own making . (Sec. 4(f), Revenue Regulations No. 1-68; Sec. 2 (b) (2), Rev. Regs No. 6-82, as amended) In view of the foregoing, the separation pay you received in the total amount of P36,320.00 as a consequence of your involuntary separation from the service of your employer is not subject to income tax imposed under Section 24 (A) of the Tax Code of 1997, and consequently to the withholding tax on wages pursuant to Section 79, Chapter XIII, Title II of the Tax Code as implemented by Revenue Regulations No. 2-98, as amended. However, the amount received corresponding to your backwages and the amount representing your unpaid salary plus the illegal deduction made thereof in the aggregate amount of P235,804.56 cannot be considered as benefits paid as a consequence of your involuntary separation from the service of your employer within the contemplation of Section 32 (B) (6) (b) of the 1997 Tax Code; instead they are remuneration for services that are deemed to have been performed by you for your company prior to or during the period of your illegal dismissal from the service as affirmed by the NLRC. Such being the case, said backwages and the amount representing your unpaid salary plus the illegal deduction made therefrom are subject to income tax and consequently, to the withholding tax on wages pursuant to Section 79, Chapter XIII, Title II of the Tax Code as implemented by Revenue Regulations No. 2-98, as amended. In other words, URRDC shall have the obligation and liability to withhold the corresponding taxes with respect to such wage payments and the amount paid to you for unpaid salary plus the amount it illegally deducted from your salary. On the other hand, in filing your annual income tax return, you should report as income and pay your income tax by allocating or spreading your backwages and the amount paid to you as still unpaid salary plus the amount URRDC had illegally deducted from it, for the corresponding years such wages or salary have been earned or such deductions have been made, and crediting the corresponding income tax withheld from the same. Moreover, the amount of P1,141.00 representing the reimbursement of transportation, representation, legal and other incidental official expenses is exempt from income tax. Likewise, the corresponding 13th month pay you received from June 1, 1997 up to November 12, 1998 and the amount of P5,000.00 representing the proportional 13th month pay from January to May 1997 are exempt from income tax, the same being treated as an exclusion from the gross income under Section 32 (B) (7) (e) of the Tax Code of 1997. 2) The conveyance of the aforesaid parcel of land by URRDC in your favor as payment of your backwages and separation pay is subject to the creditable withholding tax imposed under Sec. 2.57.2 (J) of Revenue Regulations No. 2-98, as amended, the law applicable at the time the Deed of Quitclaim and Conveyance in Satisfaction of Judgment Award was executed. Under the said provision, except as otherwise provided, there shall be withheld a creditable income tax rates from the following items of income payments to persons residing in the Philippines: "(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5 of these Regulations Exempt With a selling price of five hundred thousand Pesos (P500,000.00) or less 1.5% With selling price of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000.00) 3.0% With selling price of more than two million pesos (P2,000,000.00) 5.0% "A seller/transferor must show proof of registration with HLURB or HUDCC to be considered as habitually engaged in the real estate business . . . .'" HEScID The foregoing creditable withholding tax rates apply to sale or disposition of real properties by a taxpayer who is habitually engaged in the real estate business. Categorically, under Section 39 of the 1997 Tax Code, these properties held by a taxpayer primarily for sale in the ordinary course of business are considered as ordinary assets, the same being excluded in the definition of "capital asset." (Emphasis supplied.) In view of the foregoing, a creditable withholding tax at the rate of 1.5% based on the fair market value or zonal value determined in accordance with Section 6(E) of the Code, whichever is higher, for the transfer/disposition of the aforementioned subdivision lot, which is classified as ordinary asset, shall be imposed upon URRDC pursuant to Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended. Moreover, URRDC is subject to the ten percent (10%) value-added tax on the transfer of said subdivision lot originally intended for sale or for use in the course of business pursuant to Section 106(B) of the Tax Code of 1997, the same being considered as a "deemed sale" transaction. 3) Your query regarding exemption from transfer taxes does not fall within the jurisdiction of this Office. You are advised, therefore, to address the same to the Bureau of Local Government Finance, Department of Finance. 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 as null and void. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue