Whether Mr. Ernesto P. Isip is Liable to Pay Transfer and Capital Gains Tax on the Mortgage Foreclosure Sale of His Property

March 3, 1995 BIR RULING NO. 047-95 21 (e) 000-000 047-95 Atty. Rene A. V. Saguisag 4043 Bigasan Street Palanan, Makati City S i r : This refers to your letter dated January 25, 1995 requesting in effect for a ruling as to whether or not your client, Mr. Ernesto P. Isip is liable to pay transfer and capital gains tax on the mortgage foreclosure sale of his property. cdt It appears that your aforesaid client obtained a loan from Home Savings Bank & Trust Co. whereby he mortgaged his property; that on October 8, 1984, Home Savings Bank and Trust Co. foreclosed the mortgage on his property and title to the property was transferred in the name of Home Savings Bank and Trust Co.; that subsequently, your client filed an action in court against Home Savings Bank and Trust Co. on the said foreclosure docketed as Civil Case No. 84-288151 in the Regional Trial Court, National Capital Judicial Region, Branch 27, Manila; that the court in said case rendered a judgment in accordance with the Compromise Agreement submitted by the parties; that on January 6, 1995, the said court issued an order directing the Register of Deeds of the City of manila to cancel TCT. No. 167352 in the name of Home Savings Bank & Trust Co. and to issue, in its place a new certificate of title in favor of your client over the same property as would restore his ownership thereto prior to the foreclosure subject of the proceedings; and that on appeal, the appellate court rendered a decision to the effect that it considers the appeal withdrawn and that the order directing the issuance of a writ of execution, in accordance with the terms of the Compromise Agreement anent the cancellation of TCT No. 167351, may be obtained by the parties directly from the Court a quo upon proper motion without need of an order from the said court (Court of Appeals); and that paragraphs no. 1 and 2 of said Compromise Agreement states: "1. Plaintiff Appellee (Isip) has paid defendant appellant (Homebank) an amount sufficient to pay the loan which led to the foreclosure sale subject of this pending. "2. As a consequence of the satisfaction of Homebank's claim against Isip, the parties agree to the withdrawal of the present appeal and conform to the execution of the judgment of the trial court insofar as it orders the annulment of the foreclosure sale of Isip's property." In reply, please be informed that under Section 2.2 of Revenue Memorandum Order No. 6-92 dated January 15, 1992 the payment of capital gains tax applies not only to ordinary sale transaction but also to pacto de retro sales, which necessarily includes mortgage foreclosure sales (judicial and extra-judicial foreclosure sales). In the instant case, the foreclosure sale which erroneously led to the transfer of the Title to the mortgagee bank, Home Savings Bank & Trust Co., has been annulled judicially, hence, as if no foreclosure sale has taken place. Such being the case, and since the taxable event upon which the capital gains tax may be imposed has been annulled, this Office is of the opinion as it hereby holds, that your client, Ernesto Isip, is not liable to pay the 5% capital gains tax prescribed under Section 21(e) of the Tax code, as amended, on the said foreclosure sale of his property. As regards the transfer tax on said foreclosure sale, it is suggested that your query on the same be directed to the Local Government Unit concerned, the same falling within its jurisdiction. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue