BIR Ruling No. 004-09

March 6, 2009 BIR RULING NO. 004-09 RR 13-2001; RMC 7-90; 000-00 Mrs. Antonietta G. Fuentes Thru Counsel: Atty. Mario D. Ortiz AGF & Sons Dev. Corp. M & J Ortiz Bldg., # 347 V. Rama Avenue Guadalupe, Cebu City Madam : This refers to your letters dated February 15, 2007, March 12, 2008 and August 27, 2008, requesting as follows: 1) Exemption from the payment of capital gains tax on the conveyance of real property by Spouses Pompio and Susana Sombilla in favor of AGF & Sons Development Corp., represented by you as its President, in compliance and pursuant to a Court Order; 2) Waiver of the penalties, surcharge and interest imposed for the late filing and payment of taxes. The facts borne out from the documents submitted are as follows: Spouses Pompio and Susana Sombilla are the registered owners of a parcel of land known as Lot No. 4137-d-2 of Psd-13481, with improvements thereon, located in Bulacao, Pardo, Cebu City, covered by Transfer Certificate of Title (TCT) No. 31260 of the Registry of Deeds of Cebu City. EcDSTI On April 12, 1993, the above spouses executed a Contract to Sell, covering the aforementioned real property, in favor of AGF & Sons Realty Development Corporation ("AGF" for brevity), for and in consideration of the sum of P2,500,000.00; P1,000,000.00 of which was given to Spouses Sombilla as down payment upon execution of the contract and the balance of P1,500,000.00 was payable in installments for a period of three (3) months. The payment of the balance, however, was stopped by AGF due to the fact that the sellers, Spouses Sombilla, failed to secure a road right of way as agreed in the Contract to Sell. It was AGF then that paid for the road right of way for a consideration of P75,000.00, payment made to the owner of the subservient property on September 13, 1995. Subsequently, on November 7, 1995, Spouses Sombilla executed a Real Estate Mortgage (REM) covering the subject real property in favor of Rural Bank of Subangdaku, Mandaue (Cebu), Inc., as a security for their loan of P1,500,000.00. Upon knowing such development, AGF wrote a letter to the bank informing the latter that the property mortgaged by Spouses Sombilla is already a subject of a Contract to Sell, wherein it is the buyer. Despite such information, on December 3, 1997, the bank foreclosed the mortgage and consolidated the title of the subject property in its favor. The subject realty is now under the name of the bank covered by TCT NO. 157656 of the Registry of Deeds of Cebu City. AcTDaH On April 7, 1998, AGF filed a complaint against Spouses Sombilla, Patrick and Roel Sombilla and the bank for Specific Performance and Damages docketed as Civil Case No. CEB-21863 at the Regional Trial Court of Cebu, 7th Judicial Region, Branch 19, Cebu City. On July 14, 2001, the Court rendered a decision in favor of AGF whereby it ordered the foreclosure proceedings conducted by the bank null and void. Moreover, the Court ordered the concerned Register of Deeds to cancel TCT No. 157656 issued to the bank and to cancel all mortgages annotated thereto. Further, the Court ordered AGF to pay its balance of P1,071,100.25 to Spouses Sombilla and ordered the latter to execute the necessary Deed of Absolute Sale for the transfer of title of the subject realty to AGF upon receipt by the spouses of the said amount. The spouses were likewise ordered to pay to AGF the amount of P2,700,000.00 as actual damages. IATHaS The said decision was appealed by the bank to the Court of Appeals (CA) but to no avail. The decision of the CA affirming the decision of the lower court was challenged by the adverse party with the Supreme Court (SC) and still to no avail. Consequently, an Entry of Judgment was issued by the SC on February 1, 2006 which became final and executory on June 29, 2006. On October 7, 2006, Spouses Sombilla executed the Deed of Absolute Sale in favor of AGF. However, since at the time of execution of the said Deed of Absolute Sale, AGF was already in a financial difficulty, the balance of P1,071,100.25 to be paid by AGF to Spouses Sombilla was agreed to be deducted from the amount of P2,700,000.00 to be paid by the spouses to AGF as actual damages. On November 11, 2006, the Court ordered the Rural Bank of Subangdaku, Mandaue (Cebu), Inc. to release the title of the subject property to AGF. Early in February 2007, the bank complied with the said order and delivered the title of the subject property to AGF. AGF then presented the Order of the court and the title of the property, which was already under the name of the bank, to the Registry of Deeds of Cebu City in order to effect transfer of title of the subject realty in its favor. The Register of Deeds required AGF to obtain first the Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCL) from the BIR. Hence, the request for a tax exemption filed on February 15, 2007 by AGF with the Legal Division of Revenue Region No. 13, Cebu City. Anticipating that it will be required to pay taxes, AGF then demanded for the payment of the balance of the reward of actual damages in order for it to pay the amount corresponding to the taxes due on the transfer and to effect the transfer of title of the subject property in its name. Spouses Sombilla, however, failed to comply with its demand as they are likewise in bankruptcy. Hence, AGF is contemplating to sell portions of the subject realty to raise the funds for the payment of taxes in order for it to register the property in its name. In reply thereto, please be informed that although the transfer of the subject realty is by virtue of a court order, the same has emanated from a sale transaction. As such, the corresponding taxes on sales, conveyances or transfers of real property for a consideration shall be imposed therewith. Considering that the subject realty is a capital asset of the sellers-defendant, Spouses Sombilla, the transfer of said property, therefore, is subject to the capital gains tax. However, in view of the fact that the subject sale took place in 1993, and considering that the same is a sale of real property on a deferred payment basis not on the installment plan since the initial payment made in the year of sale exceeded twenty-five percent (25%) of the gross selling price, the capital gains tax due thereon should have been paid within thirty (30) days after April 12, 1993. As such, the basis for the taxes on the said sale should be the price agreed upon by the contracting parties or the zonal value prevailing thereon, whichever is higher. Further, the rate of taxes to be imposed therewith should be based on the rate prevailing on such date. [Revenue Memorandum Circular (RMC) No. 7-90; BIR Ruling No. 003-98 dated January 16, 1998] cIECTH Accordingly, under Section 21 (e) of the Tax Code of 1977, as amended, the law applicable at the time of sale, a tax at the rate of five percent (5%) is imposed on the capital gains presumed to be realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets, based on the gross selling price or fair market value prevailing at the time of sale. The capital gains tax imposed on sales of real property is an income tax, hence, a direct tax which obviously is the direct liability of the seller of real property. (BIR Ruling No. DA-243-96 dated January 16, 1996) aECSHI In the instant case, AGF, the buyer, assumed the liability to pay the taxes due on the above sale transaction. However, it was precluded to do so because the sellers failed to deliver the subject realty in its favor, and for that, a prolong litigation ensued by and between it and the sellers. In view thereof, it is only but fair and just that AGF shall not be made liable to pay the corresponding penalty surcharge and interest imposed for failure to render return within the time prescribed and to pay the capital gains and documentary stamp taxes within the prescribed period as it has still to assert its right over the subject realty. Where it not for the act of the sellers which led to a prolong litigation, the buyers could have caused the payment of taxes and transfer of title of the subject property in its name. In view of the foregoing and in the interest of justice and fair play, this Office hereby grant AGF an authority to pay the 5% capital gains tax and the 1% documentary stamp due on the 1993 sale transaction pursuant to Sections 21 (e) and 196 of the 1977 Tax Code, without payment of the penalty and surcharge. The taxes herein imposed shall be based on the consideration contracted to be paid or on the zonal value of the subject property prevailing in 1993, whichever is higher. The foregoing is notwithstanding the fact that the Final Deed of Absolute Sale transferring ownership over the subject realty to AGF was effectively made by the sellers, pursuant to the court order, only in October of 2006. This Office is cognizant of the fact that AGF's case has been presented to the BIR since the first quarter of 2007 for determination of the tax consequence thereof. Hence, no surcharge and penalties shall be imposed thereon considering the legal intricacies surrounding the case. (Sec. 2.5 of Revenue Regulations No. 13-2001) . However, the corresponding interest shall be imposed beginning October 2006 up to the time the tax shall have been paid. In view thereof, the RDO of the place where the property is located is hereby directed to compute the 5% capital gains tax and the 1% documentary stamp tax due on the 1993 sale transaction, including the interest to be imposed beginning October 2006 up to the time the tax shall have been fully paid, and then have the same collected before issuing the Certificate Authorizing Registration (CAR) on the transfer of the property covered by Transfer Certificate of Title No. 157656 of the Registry of Deeds of Cebu City registered in the name of Rural Bank of Subangdaku Mandaue (Cebu), Inc. to AGF. Please be guided accordingly. (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue