Transfer of Real Properties as Payment of Attorney's Fees Subject to Capital Gains and Documentary Stamp Taxes

September 13, 2004 BIR RULING NO. 015-04 Sec. 24 (D) 000-00 Atty. Hector P. Teodosio Suite 304 3/F UEC Building J. M. Basa-Mapa Streets, Iloilo City S i r : This refers to your letter dated November 17, 2001 requesting for exemption from the payment of capital gains tax on the transfer of several real properties in your favor received as part of payment of your attorney's fees. It is represented that on September 25, 1998 the Regional Trial Court of Negros Occidental Branch 51 issued an Order in Civil Case No. 1446, entitled Cipriano Pedrosa vs. Angelica Ledesma , awarding in your favor eighteen (18) lots of the Pedrosa-Ledesma Subdivision, namely: Blk. No. Lot No. Title No. Area 1. 11 11 T-61850 300 sq. m. 2. 11 12 T-61851 300 sq. m. 3. 11 15 T-61854 295 sq. m. 4. 07 02 T-61765 271 sq. m. 5. 07 03 T-61766 278 sq. m. 6. 11 16 T-61855 293 sq. m. 7. 11 17 T-61856 328 sq. m. 8. 13 02 T-61887 313 sq. m. 9. 13 04 T-61889 264 sq. m. 10. 13 05 T-61890 300 sq. m. 11. 13 07 T-61892 300 sq. m. 12. 13 09 T-61894 300 sq. m. 13. 13 11 T-61896 393 sq. m. 14. 02-B 16 T-61662 270 sq. m. 15. 02-B 17 T-61663 328 sq. m. 16. 03-B 06 T-61682 304 sq. m. 17. 02-B 05 T-61651 240 sq. m. 18. 02-B 24 T-61670 388 sq. m. that the aforementioned lots were awarded in your favor as a settlement of your attorney's fees for the services you rendered to Angelica Ledesma, the defendant of the above-mentioned civil case; that it is your contention that the transfer of the above-stated realties in your favor as payment of your attorney's fees is not subject to the capital gains tax but the total value of the same shall be treated as income from your profession which shall form part of your gross income and subject only to the regular income tax. cHATSI In reply, please be informed of the following: 1. The transfer of the above eighteen (18) lots of the Pedrosa-Ledesma subdivision in your favor as payment of your attorney's fees for the services you rendered to Angelica Ledesma is subject to the capital gains and the documentary stamp taxes based on the total fair market value of the said realties as prescribed in Section 6(E) of the Tax Code of 1997, as imposed under Sections 24(D)(1) and 196 of the same Code, respectively, to wit: "SEC. 24. Income Tax Rates . xxx xxx xxx (D) Capital Gains from Sale of Real Property . (1) In General . The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: . . ." "SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property . On all conveyances, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher: . . ." The liability to pay the above taxes imposed on the transfer of realties in your favor shall be shouldered by Angelica Ledesma, the transferor, whom under the abovequoted provision is presumed to have realized capital gains on the said transaction. 2. The total fair market value of the above properties received as attorney's fees computed based on Section 6(E) of the Tax Code of 1997, shall form part of your gross income in accordance with Section 32(A)(2) of the same Code which states in part, to wit: "SEC. 32. Gross Income . (A) . . . gross income means all income derived from whatever source, including (but not limited to) the following items: (1) . . . ; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; . . ." which shall be subject to the regular income tax imposed under Section 24(A) of the Tax Code of 1997. CEaDAc 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. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue