Tax Consequences of Donation under a Compromise Judgment

July 18, 2001 BIR RULING NO. 029-01 Legaspi & Associates Suite 708 Landsdale Tower Mother Ignacia corner Timog Avenue Attention: Atty . Domingo Z . Legaspi Tax Counsel Gentlemen : This refers to your letter dated November 15, 2000 on behalf of your clients JORGE MISAEL, VLADIMIR GEORGE, ROSALINA RUBY, RUBY ANNA and KERRI LYNN, all surnamed NERI (Neri children for brevity). It is represented that on March 27, 1989, the Regional Trial Court of Makati, Metro Manila, Branch 149 rendered its decision in Civil Case No. M-001 entitled Jorge B. Neri vs. Ruby Vera-Neri approving, in toto , the Compromise Agreement entered into by and between the spouses Jorge B. Neri and Ruby Vera-Neri; that paragraph V of said Compromise Agreement provides that: "V. The property situated at Dasmarias Village, Makati, Metro Manila (Lot 12, Block 6, No. 2291 Magnolia Street) and the house and other improvements erected and or introduced therein shall be held by the plaintiff Jorge B. Neri in trust (with right of usufruct during his lifetime) for the parties' five children (Jorge Misael, Vladimir George, Rosalina Ruby, Ruby Anna and Keri Lynn)." that the Neri children are now all of legal age, the youngest child Keri Lynn having reached the age of twenty (20) years old on February 6, 2000; that title to the property, Transfer Certificate of Title No. 304319, is in the name of Ruby Vera-Neri, married to Jorge B. Neri; that the Neri children now desire to formally transfer to their names the title to said real property; that the Register of Deeds of Makati City required, among others, the submission of the Certificate Authorizing Registration; that the Revenue District Officer of Revenue District Office No. 50 advised you to seek a ruling from the Office of the Commissioner of Internal Revenue on whether or not said transfer is subject to tax. Pursuant to the advise of the Revenue District Officer of RDO 50, you seek for a definitive ruling on the following issues: I. Is paragraph V of the Judgment on Compromise, supra ., taxable? II. If it is subject to tax, what kind of tax or taxes? III. Is said transfer liable for penalties or surcharges? IV. If it is liable for penalties and surcharges, what is the reckoning period of the imposition thereof? V. Is the value of the usufruct deductible from the value of the property for purposes of computing the taxes due on the transfer? In reply, please be informed of the following: I. & II. Whether or not the Transfer is Subject to Tax The transfer of property by gift under paragraph V of the Judgment on Compromise, being a transfer of property without any consideration or compensation, is subject to donor's tax imposed under Section 91 of the NIRC of 1977, as amended, now Section 98 of the NIRC of 1997 quoted below: "SEC. 91. Imposition of Tax . (A) There shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property by gift, a tax, computed as provided in Section 99. HDCTAc (B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible." III. & IV. Whether or not the Transfer is Subject to Penalties or Surcharges Section 97 of the NIRC of 1977, as amended, now Section 103 of the NIRC of 1997, provides: "SEC. 97. Payment of Tax . (a) Time and place of payment of tax . The donors tax imposed by Section 92 shall be paid at the time the return is filed. The tax shall be paid by the donor to the Revenue District Officer, Collection Agent or duly authorized treasurer of the city or municipality in which the donor was domiciled at the time of the transfer or if there is no legal residence in the Philippines with the Office of the Commissioner of Internal Revenue." Furthermore, Section 9 of Revenue Regulations 17-93 dated August 30, 1990 states that: "SEC. 9. WHAT LAW GOVERNS THE IMPOSITION OF THE DONOR'S TAX? . . . The donor's tax shall not apply unless and until there is a completed gift. (Am Jur. 2d, p. 845) The transfer of property by gift is perfected from the moment the donor knows of the acceptance of the donee; and completed by the delivery to the donee either actually or constructively of the donated property. (Art. 734 Civil Code; Richardson, 39 BTA 927, Macomber, T.C. Memo, 6-6-51) Thus the law in force at the time of the perfection/completion of the donation shall govern the imposition of the donor's tax." The pivotal issue therefore in your query is the date the transfer of property by gift was completed. It is your contention that: "Though the right was created upon the finality of judgment, the operative act of entitlement to formally effect transfer may happen only when the child or children concerned have reached the age of majority in effect, creating a suspensive condition i.e. happening or non-happening of a future and uncertain event, reaching the age of majority. But when the condition is fulfilled, the entitlement retroacts to the date of constitution of entitlement." We do not agree. A valid donation of real property in a public instrument transfers not only ownership but also possession because the execution of such instrument is one form of delivery unless of course, there is a contrary intention which can be inferred from the deed (Ortiz vs. Court of Appeals, 97 Phil. 46). Therefore, the donation under consideration was completed on March 27, 1989 when the Court approved the Compromise Agreement entered into by and between the spouses Ruby Vera-Neri and Jorge B. Neri. Upon the approval of said document, the ownership of the said property was transferred from Ruby Vera-Neri to the Neri children. From that time on, the Neri children could have transferred to their name title to the property. The fact that the Neri children decided to transfer the title to the property in their name only when the youngest among them, i.e ., Keri Lynn, reached the age of twenty (20) years old on February 6, 2000 does not negate the fact that the transfer by gift of the said property was completed on March 27, 1989 when the Court approved the Compromise Agreement entered into by and between the spouses Ruby Vera-Neri and Jorge B. Neri. The donor's tax, therefore, should have been paid thirty (30) days from March 27, 1989 pursuant to Section 97 of the NIRC of 1977, as amended, supra . Thus the donation mentioned above is subject to surcharges and interest computed from April 27, 1989 not February 6, 2000. V. Whether or not the Value of the Usufruct is Deductible from the Value of the Property Donated: Section 95 of the NIRC of 1997, as amended, now section 102 of the NIRC of 1997, provides: "SEC. 95. Valuation of gifts made in property . If the gift is made in property, the fair market value thereof at the time of the gift shall be considered the amount of the gift. In case of real property, the provisions of paragraph two, Section 81 shall apply to the valuation thereof." Section 81, paragraph 2, now Section 88 (B) states that: "SEC. 81. Determination of the value of the estate . . . . (b) Properties . The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be whichever is higher of (1) The fair market value as determined by the Commissioner, or DaAIHC (2) The fair market value as shown in the schedule of value fixed by the Provincial and City Assessors. ( As amended by PD No. 1994 ) The property donated is valued based on the fair market value as determined by the Commissioner of Internal Revenue or as shown in the schedule of value fixed by the Provincial and City Assessors. Therefore, the value of the usufruct shall not be deducted from the value of the property donated as it is not provided by law. The donor's tax is imposed on the transfer of property not on the receipt of the property. For purposes of the donor's tax what is pertinent is the value of the property transferred by the donor not the value of the property received by the donee. The fact that the usufruct of the property donated was given to the father of the Neri children until his death may diminish the value thereof from the point of view of the latter but it does not, in any way, reduce its value from the point of view of what the donor transferred by gift. This ruling is being issued based on the foregoing facts as represented. However, if upon investigation, the facts are different, this ruling is considered void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue