Whether DBP is Liable to Pay Capital Gains Tax Considering that the Law on Capital Gain Was Not Yet in Effect at the Time of Acquisition

January 11, 1994 BIR RULING NO. 013-94 21 (e) 196 000-00 013-94 Development Bank of the Philippines Office of the Legal Counsel Makati, Metro Manila Attention: Mr . Bonifacio M . Abad Vice President Gentlemen : This refers to your letter dated September 1, 1993 stating that a parcel of land located at Sum-ag, Bacolod City covered by TCT No. T-79172, of the Register of Deeds of Bacolod City, registered in the name of Spouses Rudy Chua and Angeline Ramos, was foreclosed and acquired by the Development Bank of the Philippines for P340,890.00 as the highest bidder in the auction sale conducted on November 15, 1978; that the certificate of sale dated November 15, 1978, was registered with the Register of Deeds of Bacolod City on January 3, 1979; that on January 3, 1980, the one year redemption period expired and the mortgagors did not exercise their right of redemption; that Deed of Consolidation of Ownership together with the supporting papers for registration were presented to the Revenue District Officer Bacolod City for assessment of taxes; that on November 20, 1992 the Bank was assessed the total amount of P407,112.77 representing payment of the following taxes: cdtech 1. Documentary Stamp Tax P 41,040.00 25% Surcharge 10,260.00 P51,300.00 2. Capital Gains Tax 5% of ZV P205,170.00 25% Surcharge 51,292.50 20% Interest 83,350.27 for 4-27-92 to 11-30-92 Compromise Penalty 16,000.00 P355,812.77 3. Total Amount of Taxes Assessed P407,112.77 ======== that the aforesaid deficiency documentary stamp and capital gains taxes were assessed based on a zonal valuation of the property, as follows: Land: P300.00 per sq. m. x 13,053 sq. m. = P3,915,900.00 Improvements: P75,000.00 x 250% = P187,500.00 Total zonal valuation of properties = P4,103,400.00 =========== that DBP argues that when the Bank-acquired the properties of Mr. & Mrs. Chua in 1978, the law on capital gains tax was not yet in effect and therefore, the Bank should only pay the documentary stamp tax, the computation of which should be based on the acquisition cost which is P340,890.00; and, that the Revenue District Officer of Bacolod City did not agree and insisted that DBP should pay the amount of P407,112.77, representing the capital gains tax, documentary stamp tax, surcharges, compromise penalty and corresponding interest. In view thereof, you now request for a ruling on the following queries: 1. "Is DBP liable to pay the capital gains tax considering that the law on capital gain was not yet in effect at the time we acquired Mr. Chua's property in 1978?" 2. "What should be the basis for computing the documentary stamp tax that DBP should pay on Mr. Chua's property acquired in 1978 considering that the law on zonal valuation was not yet in effect?" In reply thereto, please be informed of the following: 1. The capital gains tax will not apply in the instant case since then Section 34(h) of the Tax Code as amended by Batas Pambansa Blg. 37 which subjected to the final schedular income tax, capital gains derived from the sale of real property took effect on September 7, 1979. Instead, the individual sellers are the ones who are subject to income tax on the gain derived from the sale which should have been reported in their income tax return; and 2. The basis in computing the documentary stamp tax on Mr. Chua's property acquired by DBP in 1978 is the consideration, or value received or contracted to be paid for such realty. Accordingly, upon consolidation of the title to the DBP, the documentary stamp tax due on the said transaction based on the actual bid price of P340,890.00 shall be paid, together with the surcharges and compromise penalty. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue