BIR Ruling No. 021-12

January 11, 2012 BIR RULING NO. 021-12 Section 24 (D) (1), NIRC; BIR Ruling No. 102-99; Reynaldo M. Rodriguez Suite 401 Downtown Center Bldg. 516 Q. Paredes St., Binondo, Manila Sir : This refers to your letter dated February 22, 2011 requesting for confirmation of your opinion that in cases of expropriation, the owners of the property may opt to be taxed on the said transaction under Section 24 (D) (Capital Gains Tax on Sale of Real Property) of the National Internal Revenue Code (NIRC) and in such cases, the consideration paid for by the Government should be reported in their respective capital gains tax returns and not in their income tax returns. Based on documents submitted, it appears that your clients, Basilia Manotok de Dios, Pamposa Manotok-Pajarillo, Lucia Manotok-Macam, Gregorio Pajarillo and Macman Investments Corporation represented by Antonio M. de Dios (hereinafter referred to as "property owners") owned several properties located at the Sampalukan area of Caloocan City. The City Government of Caloocan filed a Complaint for Expropriation dated February 24, 1999 before the Regional Trial Court of Caloocan City. Finding the Complaint sufficient in form and substance, the court issued an Order authorizing Caloocan to enter and take immediate possession of the properties sought to be expropriated. In a Decision dated May 3, 2001, the court upheld the power of Caloocan to expropriate the properties for low cost housing and fixed the just compensation to be paid by Caloocan for each of the properties. The said decision was appealed to the Court of Appeals, which affirmed the validity of the expropriation of the properties in furtherance of Caloocan's duty to provide low-cost land and housing for its homeless and underprivileged citizens under R.A. No. 7279. However, the Court of Appeals increased the amount of just compensation to be paid by Caloocan to the property-owners. The said Decision listed the following properties as having been legally expropriated by Caloocan TCT No. T-200680, TCT No. T-200689, TCT No. 177164, TCT No. 142683, TCT No. T-200688, TCT No. T-200687, TCT No. 48748, TCT No. T-116537, TCT No. 104483, TCT No. 142685, TCT No. 142687, TCT No. 48751, TCT No. 280312, and TCT No. 200686. In lieu of a Deed of Sale, the property owners and Caloocan entered into a Memorandum of Agreement dated November 24, 2009 whereby the amount to be paid by the latter to the former was fixed at Three Hundred Eleven Million Four Hundred Eighty Seven Thousand Nine Hundred Sixty Two and 87/100 (P311,487,962.87). It is further represented that your clients have opted to treat the said transaction under Section 24 (D) of the National Internal Revenue Code of 1997 (NIRC). TAcDHS In reply, please be informed that in all cases involving sale, exchange, or any disposition of real property, classified as capital assets, including pacto de retro sales and other forms of conditional sales, located in the Philippines, 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 the Tax Code of 1997, whichever is higher, shall be imposed upon capital gains presumed to have been realized pursuant to Section 24 (D) (1) of the same Code. Provided, that the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or-controlled corporations shall be determined either under Section 24 (A) or under Section 24 (D) (1), at the option of the taxpayer. This option, however, may be availed of only by individual taxpayers. Clearly, the case at bar partakes the nature of an exercise of eminent domain of an instrumentality of the State. Moreover, since the individual property owners have opted to determine their tax liability under Section 24 (D) (1), they are required to file capital gains tax returns showing therein as tax base the entire consideration paid to them by the City Government of Caloocan. It is noted, however, that one of the property owners is a corporation Macman Investments Corporation. As previously stated, the option under Section 24 (D) is not available to a corporate taxpayer. Hence, the tax liability of Macman Investments Corporation shall be determined under Section 27 (A) or Section 27 (D) (5) of the NIRC depending on whether the property is a capital asset or an ordinary asset. Finally, the valuation of the property for purposes of determining the tax liability shall be the gross selling price or current fair market value as determined in accordance with Section 6 (E) of the NIRC, whichever is higher. 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. TAaCED Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue