Capital Gains Liability for Sale of Property

September 26, 2001 BIR RULING NO. 045-01 Bustos Villafuerte and Associates Suite 408 Delta Building West Avenue corner Quezon Avenue Quezon City Attention: Atty. Nicolito L. Bustos Gentlemen : This refers to your letter dated March 28, 2000 stating that the capital gains liability of your client Mr. Jose C. Figueras II, et. al., for the sale of their property covered by Transfer Certificate of Title No. 64387 to Milton Incorporated is only P97,319.00. The records show that: On March 25, 1994, Spouses Eduardo and Lydia Figueras, Spouses Leonardo and Ruby Flores and Jose C. Figueras II married to Lourdes Cabaltica executed a Real Estate. Mortgage in favor of the Philippine National Bank (PNB) over the property covered by Transfer Certificate of Title No. 64387 located at No. 93, 7th Avenue, Cubao, Quezon City, to secure the payment of a loan in the amount of P5,000,000.00. On April 13, 1998, the property covered by TCT No. 64387 was sold in public auction to PNB for and in consideration of the amount of P7,378,003.11. Capital Gains Tax in the amount of P442,681.00 was paid as shown by Official Receipt No. 601984. On March 6, 2000, a Deed of Reconveyance was executed by PNB in favor of Jose C. Figueras, married to Ma. Lourdes Cabaltica and Ruby Flores, married to Leonardo B. Flores the property covered by TCT No. 64387 for and in consideration of the amount of P8,500,000.00. On March 7, 2000 Jose C. Figueras married to Ma. Lourdes Cabaltica and Ruby Flores married to Leonardo B. Flores sold the same property to Milton Incorporated in the amount of P9,000,000.00. On March 31, 2000, the capital gains tax in the amount of P97,319.00 (representing the difference between the capital gains tax due on the sale in the amount of P540,000.00 minus P442,681.00, the capital gains tax paid on the foreclosure sale) was paid under Official Receipt No. 2598770. It is your position that the capital gains tax liability of your clients in the sale of their property to Milton Incorporated is only P97,319.00. Considering that the property covered by TCT No. 64387 was redeemed and subsequently sold to Milton Incorporated, the capital gains tax paid by the Spouses Figueras in the foreclosure sale in the amount of P442,681 should be deducted from the capital gains tax due on the sale of the same land to Milton Incorporated in the amount of P540,000.00 Further, you contend that under Section 3(1) of Revenue Regulations No. 4-99 dated March 9, 1999, no capital gains should have been due on the foreclosure of the property as Jose Figueras, et. al., redeemed the property within one year from the foreclosure thereof. In reply, please be informed that this Office finds no merit in your position. The capital gains tax paid by PNB in the foreclosure sale of the property covered by TCT in the amount of P442,681 cannot be deducted from the capital gains tax due on the sale of the same land to Milton Incorporated in the amount of P540,000.00. Section 21 (e) of the NIRC of 1997, as amended, now 24(D)(1) of the NIRC of 1997, provides: "(D) Capital Gains from Sale of Real Property. (1) In General . The provisions of Section 39(B) notwithstanding, 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 this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, . . ." Revenue Memo Order (RMO) No. 6-92, dated January 15, 1992, provides further that: "Considering that in extra-judicial foreclosure sales under Act 3135 as amended by Act 4118, the creditor financial institution (bank, finance and insurance companies) is the statutory seller representing the owner-mortgagor of the real property, the said financial institution becomes liable for the payment of the capital gains tax due on such foreclosure sale based on the bid price in the auction sale. The bank, finance and insurance companies, however, may get a reimbursement or recover the capital gains tax paid, if the right of redemption is exercised by the debtor-mortgagor or when the property is sold to any party whatsoever. (BIR Ruling No. 066-92) Accordingly, Section 2.2 of RMO No. 29-86, as amended by RMO No. 16-88 and as further amended by RMO 27-89 is therefor hereby amended to read as follows: "2.2. The tax applies not only to ordinary sale transactions but also to pacto de retro sales and other forms of conditional sales, which necessarily includes mortgage foreclosure sales (judicial and extra-judicial foreclosure sales)." The capital gains tax is imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales such as mortgage foreclosure sales whether it is done judicially or extra-judicially. Applying the foregoing provisions of law to the case of your client, it is clear that the capital gains tax paid by the Spouses Figueras in the foreclosure sale in the amount of P442,681 cannot be deducted from the capital gains tax on the sale of the same land to Milton Incorporated in the amount of P540,000.00. The foreclosure sale of the property covered by TCT No. 64387 on April 13, 1998 is subject to capital gains tax. The collection of the amount of P442,681 for capital gains tax on the foreclosure sale is neither illegal nor erroneous. Your contention that under Section 3 (i) of Revenue Regulations No. 4-99 dated March 9, 1999, no capital gains should have been due on the foreclosure of the property as Jose Figueras, et. al., redeemed the property within one year from the foreclosure thereof is misplaced. First, Revenue Regulations No. 4-99 does not apply to the case of your client; and Second, your client failed to redeem the property within the one-year redemption period granted under Act 3135. Revenue Regulations No. 4-99, dated March 9, 1999, took effect only on April 5, 1999, fifteen days after its publication in a newspaper of general circulation. The foreclosure sale took place on April 13, 1998. Therefore, Revenue Regulations No. 4-99 does not apply to the foreclosure sale under consideration as it is well-settled that laws or regulations do not have retroactive application unless categorically provided for in the law. Revenue Regulations No. 4-99 does not provide for its retroactive application. In fact, it is categorically provided under Revenue Memorandum Circular No. 55-99 that Revenue Regulations No. 4-99 has no retroactive application. Therefore, it is Revenue Memorandum Order No. 6-92 dated January 15, 1992 that applies, under which the capital gains tax is due upon the sale of the foreclosed property. Besides, even if the foreclosure sale transpired during the effectivity of RR 4-99, still the capital gains tax paid by the Spouses Figueras in the foreclosure sale in the amount of P442,681 cannot be deducted from the capital gains tax due on the sale of the same land to Milton Incorporated in the amount of P540,000.00 as you clients failed to redeem the foreclosed property within one-year from the registration of the Certificate of Sale with the Register of Deeds. It is categorically stated in the third whereas clause of the Deed of Reconveyance that the period of redemption expired on November 6, 1999 without Figueras et. al exercising the right to redeem the property. The admission is conclusive upon your client. There being no timely redemption, the reconveyance of the property from PNB to Figueras et. al is another sale subject to capital gains tax under Section 24 (D) (1) of the NIRC of 1997. In fine, it is the finding of this Office that there are actually three (3) transactions subject to capital gains tax in the case at bar, to wit: 1. The foreclosure sale of the property covered by TCT 64387 by PNB; 2. The reconveyance of the same property by PNB to Jose Figueras II, et. al.; and 3. The sale of the same property by Jose Figueras II, et. al., to Milton Incorporated. In this connection, please advise your client: 1. To pay the balance of the capital gains tax due on the sale of the property covered by TCT 64387 by Jose Figueras II, et al. to Milton Incorporated in the amount of P442,681 plus surcharges and interest; 2. Insure the payment of the capital gains tax due on the reconveyance of the same property from PNB to Jose Figueras II, et. al. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue