Tax Base in Computing Capital Gains Tax and Documentary Stamp Tax on Sale of Realty of Delinquent Taxpayer

September 11, 2000 BIR RULING NO. 036-00 27 (D) (5),196 000-00 Mr. Henry Lee Chuy M.H. Del Pilar Street Dagupan City S i r : This refers to your undated letter stating that you are the purchaser of a delinquent taxpayer's real estate at a tax sale conducted by the City Treasurer of Dagupan City, and accordingly, you were issued the corresponding Certificate of Sale; that a deed of final sale will be issued in your favor due to the failure of the delinquent taxpayer to redeem the property within the reglementary period of one year from the date of sale; that the Revenue District Office in Calasiao, Pangasinan is set to collect the 6% capital gains tax and documentary stamp tax on the tax sale on the basis of the fair market value or zonal valuation of the property, but you objected thereto, because you believe that the tax should be based on the bid price as in the foreclosure sale of a mortgaged real property, as provided under Revenue Regulations No. 4-99; that in the tax sale, the seller is the City of Dagupan, which under the law is exempt from tax; that the City has a statutory lien on the delinquent property as security for the payment of unpaid real estate taxes for a period of two (2) years preceding the tax sale (Section 44, Property Registration Decree, or P.D. 1529); that this tax lien is an encumbrance on the delinquent real estate, like a real estate mortgage; that the tax lien and the mortgage lien are both subject to foreclosure, the first is provided in Sections 176 and 178 of the 1991 Local Government Code and the second in Act 3135, as amended, or under Rule 68 of the 1997 Rules on Civil Procedure; that being on the same class or category as a mortgage lien, you are of the opinion that the capital gains tax and documentary stamp tax on the tax sale should be based on the bid price. Based on the foregoing representations, you are now requesting for a ruling as to whether or not your opinion on the matter is correct. In reply, please be informed that since the sale of the realty of the delinquent taxpayer, in the instant case, is the enforcement by the City of Dagupan of its tax lien for unpaid real estate taxes and is being conducted through public bidding or a public auction sale, this Office is of the opinion as it hereby holds that the tax base in computing the capital gains tax and documentary stamp tax on such sale transaction should, as in the case of mortgage foreclosure sale under Act 3135, as amended, be likewise on the highest bid price. Hence, the capital gains tax and documentary stamp tax due on the said sale of the realty you purchased in the said public auction sale by the City of Dagupan, Pangasinan, should be computed based on the highest bid price. This ruling is being issued on the basis of the foregoing facts as represented. DcAaSI However, if upon investigation, it will be disclosed that the facts are different, this ruling shall be considered null and void. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue