Whether the Vendor in a Deed of Absolute Sale is Liable to Pay the Income Tax Relative Thereto

February 18, 1992 BIR RULING NO. 059-92 21 (e) 000-00 059-92 Punongbayan & Araullo 6th Floor, Vernida IV Bldg. Alfaro St., Salcedo Village 1200 Makati, Metro Manila Attention: Atty . Rosario S . Bernaldo Tax Partner Gentlemen : This refers to your letter dated October 7, 1991 stating that a deed of absolute sale was executed on December 29, 1989 and was notarized on the same date; that it is stated in the deed of absolute sale that the capital gains tax shall be borne and paid by the VENDEE; that it turned out however, that the real property sold is an ordinary asset to the VENDOR, hence, the sale is not subject to capital gains tax but to ordinary income tax; that since the VENDEE only agreed to pay the capital gains tax, it was not able to transfer the title to the property bought because the VENDOR is not willing to shoulder the difference of the normal income tax to which the VENDEE agreed to pay; and that to avoid litigation, the VENDOR and the VENDEE mutually agreed to rescind the deed of absolute sale in 1991. Based on the foregoing representations, you now request confirmation of your following opinion: "1) The VENDOR is not liable to pay the income tax relative thereto. Consequently, if the seller has not paid the income tax relative thereto, it could not be assessed for deficiency income tax, surcharge, interest and penalty although the rescission was affected in a taxable year different from the taxable year when the deed of absolute sale was executed. "2) The VENDOR is liable to pay the documentary stamp tax on the deed of absolute sale." In reply, please be informed that under Section 21(e) of the Tax Code, as amended, 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, by individuals including estates and trusts, shall be taxed at the rate of 5% based on the gross selling price or the fair market value (zonal value) prevailing at the time of sale, whichever is higher. In the instant case, it is represented that the parties (Vendor and Vendee) mutually agreed to rescind in 1991 the Deed of Absolute Sale involving realty they executed on December 29, 1989 to avoid litigation between them due to their agreement to the effect that the vendee shall be liable to the capital gains tax due on said sales of realty which turned out to be an ordinary asset not a capital asset and therefore not subject to the capital gains tax imposed under Section 21(e) of the Tax Code, causing disagreement between the said parties since the vendor is not willing to shoulder the difference of the normal income tax to which the seller is liable and the capital gains tax which the vendee agreed to pay. Under Article 1191 of the Civil Code the power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligations with the payment of damages; in either case, he may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. Such being the case, and since rescission has been resorted to by the buyer due to seller's non-compliance with his obligation to deliver the realty sold, there was in fact no sale of the said realty, hence, the seller in the instant case, could not have realized any income as a consequence, that would have provided the legal basis for assessing deficiency income tax from such rescinded sale, including that of the corresponding penalties that would have been due had the said sale been consummated. Moreover, under Section 173 of the Tax Code, as amended, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed under the Tax Code by the person making, signing, issuing, accepting or transferring the same and at the same time such act is done or transaction had upon documents, instruments, and papers and upon acceptance, assignments, sales, and transfers of the obligations, right or property incident thereto. Accordingly, the deed of absolute sale subject of the rescission having been executed (made and signed) the obligation to pay the documentary stamp tax imposed under Section 196 of the Tax Code, has arisen notwithstanding the subsequent rescission of the same, hence, the seller/owner is liable to pay the said documentary stamp tax on the deed of sale executed by the said parties. Furthermore, the liquidating damages arising from the rescission is taxable to the recipient as ordinary income in the year of receipt. Finally, although the deed of rescission is not subject to documentary stamp tax the acknowledgment is subject to the documentary stamp tax of P3.00 pursuant to Sec. 188 of the Tax Code. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. asiacd Very truly yours, JOSE U. ONG Commissioner of Internal Revenue