Just Compensation as Tax Base for the Computation of Gains Derived from Expropriation Sale

April 11, 1991 BIR RULING NO. 061-91 16 (e) 000-00 061-91 MEMORANDUM FOR: The Assistant Commissioner National Assessment Office Returned to you herewith is the entire docket bearing on the internal revenue tax case of Cosmos Bottling Corporation, #241 MacArthur Highway, Malabon, Metro Manila, involving the proposed assessment in the amount of P361,540.93 as deficiency capital gains tax arising from the sale of portions of its properties covered by TCT Nos. 178590, 178591 and 178592 in favor of the government, represented by the National Irrigation Administration (NIA), on January 19, 1988. cdta It appears that Cosmos Bottling Corporation is a domestic corporation engaged in the business of manufacturing softdrinks; that the taxpayer was formerly named The Manila Cosmos Aerated Water Factory, Inc.; that it is the registered owner of several parcels of land situated at Muntinlupa, Rizal, covered by TCT Nos. 178590, 178591, and 178592; that on August 19, 1986, the NIA filed a civil case for eminent domain against the Taxpayer whereby the former demanded to expropriate 2,712 square meters of Taxpayer's properties for P474,325.26, with a 10% deposit of P47,432.52 only, so as to enable said NIA to construct the irrigation canal and facilities of its 2nd Laguna de Bay Irrigation Project; that on January 19, 1988, the Taxpayer entered into and executed in favor of NIA a Deed of Absolute Sale with Right of Way Easement (hereinafter Deed of January 19, 1988) whereby it sold portions of its properties; 614 sq. m. of Lot No. 290-E-1-B (covered by TCT 178590 with an area of 1,029 sq. m.); 482 sq. m. of Lot No. 293-B (covered by TCT 178591 with an area of 3,096 sq. m.); and 1,616 sq. m. of Lot No. 292-B (covered by TCT 292-B with an area of 17,886 sq. m.), for and in consideration of P474,325.26; that said Deed of January 19, 1988 was entered into by and between the parties to compromise or amicably settle Civil Case No. 14718 for Eminent Domain, filed by NIA on August 19, 1986, to already allow the passage and construction of the NIA canal and other facilities designed to siphon water from Laguna Lake to the Cavite lands for agricultural purposes; that on March 25, 1988, the Court approved said compromise agreement, and consequently, declared the said expropriation case closed; that according to the Deed of January 29, 1988, the parties agreed that the NIA shall shoulder expenses for documentation, notarization, registration and documentary stamp while the Taxpayer shall shoulder the real estate tax and capital gains tax, that subsequently, on August 8, 1988, the Taxpayer filed with this Office a capital gains tax return; that in connection therewith, the documentary stamp tax amounting to P18,275.00 was paid under Confirmation Receipt No. B14939913 dated August 26, 1988; that based on said return and payment of documentary stamp tax, this Office issued a Certificate Authorizing Registration (CAR No. 152622 on untaxed capital gains on real estate transactions) of the aforesaid properties sold in favor of the NIA; that it is stated in said certificate that the zonal valuation of the properties sold amounted to P1,301,760.00, based on a zonal valuation of P480.00 per square meter; that based on what is reflected in the Deed of Sale with Real Estate Mortgage to Secure Balance of Purchase Price, executed by an between the previous seller and the herein Taxpayer on December 20, 1966, the Taxpayer paid the amount of P133,000.00 for the purchase of Lots 292 (now Lot 292-B) and 293 (now 293-B) covering an area of 20,982 sq. m.; that finally, the taxpayer reflected in its income tax return of 1988 the amount of P445,193.76 as income from the sale of its property (see schedule 8 of Taxpayer's 1988 ITR). On the basis of the foregoing, the issue in the instant case involves the determination of the correct tax base for the computation of the gains derived by the Taxpayer from the sale of 2,712 square meters of its properties to the government as represented by the NIA. Simply put, is it proper to base the computation of the capital gains tax on the zonal valuation of the properties involved? In reply, please be informed that the gain derived by the Taxpayer from the involuntary sale of 2,712 sq. m. of its real property must be computed on the basis of the excess of the sum of money received by it as just compensation over the basis (i.e. acquisition cost) of said property. The instant case involves a situation where the Taxpayer had to sell a portion of its properties to government to enable the latter to use said land for a public purposes. Because of the involuntary conversion of Taxpayer's property by way of expropriation sale, there would arise an inequitable incidence of taxation were we to compute the gain arising out of the transaction on the basis of the fair market value, as determined by either the Commissioner of Internal Revenue or the City/Provincial Assessors, pursuant to Section 16(e) of the Tax Code, as amended. Hence, we find that the said Section 16 (e) is inapplicable to expropriation proceeding, and accordingly, to the case at hand. The "just compensation" paid to the Taxpayer by the Government is the equivalent for the value of the property at the time of its taking. It is the fair and full equivalent for the indemnity. Such being the case, the amount approved by the Court as "just compensation" must be used as the tax base for computing the gains derived out of such a transaction. The forced character of the disposition of the involved real property thus provides the justification for the above-stated treatment of gain arising from the expropriation sale. Wherefore, we rule that "just compensation" must be used as the tax base for the computation of the gains derived out of the Taxpayer's expropriation sale to the Government. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner