Tax on the Difference Between the Purchase Price Stipulated and the Fair Market Value of the Propert

January 28, 1987 BIR RULING NO. 024-87 24 (a) 180-85 024-87 Gentlemen : This refers to your letter dated November 27, 1986 requesting a ruling to the effect that the difference between the purchase price stipulated by O. Ledesma & Co., Inc. and Ms. Mercedes L. Arenas in their Agreement to Buy and Sell in 1981 and the fair market value of the property when the Deed of Absolute Sale was executed on April 15, 1986 is not subject to donor's tax. It is represented that on December 29, 1981 an Agreement to Buy and Sell was executed by and between O. Ledesma & Co., Inc. and Ms. Mercedes L. Arenas whereby the former agrees to sell and the latter commits to buy a parcel of land with improvements thereon located at 21 8th St., Doa Juana Rodriguez Avenue, Quezon City covered by Transfer Certificate of Title No. 20107 for a consideration of P1,233,520.00 payable as follows: (a) P246,704.00 upon the execution of the agreement; and (b) P246,704.00 payable on or before the 30th day of September for the next succeeding four (4) years, with interest at 12% per annum ; that on April 15, 1986 upon full payment of the total agreed price of P1,233,520.00, a Deed of Absolute Sale was executed by the parties whereby O. Ledesma & Co., Inc. sells, transfers and conveys unto Ms. Mercedes L. Arenas, her heirs, legal representatives and assigns the aforementioned property free from all liens and encumbrances; that at the time of the execution of the Deed of Absolute Sale, the fair market value of the property is P2,028,300.00 which is more than the agreed selling price of P1,233,520.00 when the Agreement to Buy and Sell was executed on December 29, 1981; and that the difference between the fair market value of the property in 1986 and the selling price of the property in 1981 is being subjected to the donor's tax. Article 1315 of the New Civil Code provides that contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which according to their nature may be in keeping with good faith, usage and law. Considering that as of December 29, 1981, O. Ledesma & Co., Inc. has agreed to sell the aforementioned property to Ms. Mercedes L. Arenas for the amount of P1,233,520.00 and in fact the buyer paid the amount of P246,704.00 upon the execution of the Agreement to Buy and Sell and P246,704.00 payable on or before the 30th day of September for the next succeeding four (4) years, with interest at 12% per annum which the buyer paid on September 29, 1982, September 7, 1983, September 30, 1984 and September 12, 1985, the parties are therefore bound by the agreed purchase price as of December 29, 1981. In fact, the gain or income derived by the seller from the aforesaid sale which is subject to the ordinary corporate income tax rates prescribed by Section 24(a) of the Tax Code as amended by Executive Order No. 37 shall be based on the amount of P1,233,520.00 which is the total contract price stipulated in the agreement to Buy and Sell (BIR Ruling No. 180-85 dated October 9, 1985). Accordingly, the difference between the purchase price agreed upon by the parties in 1981 and the fair market value of the property in 1986 when the purchase price was paid in full is not subject to the donor's tax. cdta With respect to your claim for tax credit of alleged overpaid documentary stamp tax, appropriate action will be taken thereon by this Office. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner