Taxability of Sale of Foreclosed Properties by Armed Forces and Police Savings and Loan Association

May 9, 2001 BIR RULING NO. 017-01 RR 2-98 R.A. 8367 000-00 Armed Forces & Police Savings and Loan Association, Inc . E. delos Santos Avenue cor. Bonny S. Serrano Rd. Quezon City Attention: Atty . Samuel B . Padilla Vice-President/Legal Division Gentlemen : This refers to your letter dated December 19, 2000 stating that the Armed Forces & Police Savings and Loan Association, Inc. duly authorized by the Bangko Sentral ng Pilipinas is now currently disposing all of its foreclosed properties thru public bidding or negotiated sale; that you are encountering some problems with the Revenue District Offices (RDO's) in the case of your foreclosed properties to the winning bidders; that the Revenue District Office of Tarlac required you to pay Capital Gains Tax while the Revenue District Office in Las Pias is requiring you to pay creditable withholding tax of 7.5% on the said transaction; that, however, R.A. No. 8367, otherwise known as "An Act Providing for the Regulation of the Organization and Operation of Non-Stock Savings and Loan Association" provides for the tax exemption of a non-stock Savings and Loan Association for which Armed Forces & Police Savings and Loan Association, Inc. belongs; and that you are in a quandary whether the sale or any disposition thereof of the aforesaid foreclosed properties by the Association is subject to any tax. In reply, please be informed that pursuant to Section 5 of Republic Act No. 8367, otherwise known as "An Act Providing for the Regulation of the Organization and Operation of Non-Stock Savings Loan Association", pertinent portion of which reads: "SEC. 5. Tax Exemption . An Association shall be exempt from payment of tax in respect to income it receives, including interest on its deposits with any bank; Provided, however, That income derived from any of its properties, real or personal, or any activity conducted for profit, regardless of the disposition thereof, is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code . (Emphasis supplied) xxx xxx xxx" only the income derived from any of its properties, real or personal, or any activity conducted for profit regardless of the disposition thereof, is subject to the corresponding internal taxes imposed under the National Internal Revenue Code. The subject foreclosed properties of the Association were but just collateral to secure the loans granted to the members. Considering that the Association sells the foreclosed properties not as a separate activity that is conducted for profit, but rather in the ordinary or normal course of its savings and loans association business to recoup the amount loaned, the gain, if any, from such sales is exempt from taxes as provided under Sec. 5 of the Republic Act No. 8367. There is, therefore, no basis in imposing the capital gains tax under Sec. 27(D)(5) of the Tax Code of 1997, or the expanded withholding tax required to be withheld under Sec. 2.57.2(J) of Revenue Regulation No. 2-98, as amended. Accordingly, any income derived from the sale of the foreclosed properties by the Armed Forces & Police Savings and Loan Association, Inc. is exempt from income tax under Sec. 27(A) of the Tax Code and consequently from the expanded creditable withholding tax under Revenue Regulations No. 2-98 and also from the capital gains tax under Sec. 27(D)(5) of the same Tax Code. However, the sale of the foreclosed properties will be subject to the documentary stamp tax under Section 196 of the Tax Code of 1997, based on the gross selling price or the fair market value of such property as determined by the Commissioner under Section 6(E) of the Tax Code of 1997. ADcHES This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, its shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue