Request for Refund of Capital Gains Tax

July 11, 1996 BIR RULING NO. 075-96 21 (e) 000.00 75-96 Philtrust Bank Philtrust Bank Building United nations Ave. corner San Marcelino St. Manila Attention: Ms . Perla Young-Duque Senior Vice-President Collection Department Gentlemen : This refers to your letter dated February 15, 1996 stating that the property of Messrs, Modesta, Miriam, Romwell, Judith, Joy, Dennis and Carol, all surnamed Sabeniano covered by Transfer Certificate of Title No. 113406 of the Registry of Deeds for Makati was extrajudicially foreclosed by the Office of the Clerk of Court and Ex-Officio Sheriff, RTC, Makati, for which Philtrust Bank was adjudged as highest bidder in the foreclosure sale conducted by said office on February 9, 1995; that a Sheriff's Certificate of Sale was accordingly issued by the said Office on February 24, 1995 in favor of Philtrust Bank in the amount of P18,126,882.57; that before allowing registration of said Certificate of Sale, Philtrust was required by this Office to pay the 5% capital gains tax in the amount of P906,345.00 as per Philtrust Manager's Check No. 084612 duly validated by the Traders Royal Bank branch at the Atrium Bldg. on February 24, 1995 together with the payment of the documentary stamp tax of P271,904.00; and, that the mortgagors, Ms. Modesta R. Sabeniano, et. al., redeemed the subject property and paid your bank the full redemption value on February 15, 1996, well within the one (1) year redemption period allowed by law and for which reason, Philtrust Bank executed the Certificate of Redemption (with Cancellation of Mortgage) restoring to the herein mortgagors their full ownership of the subject property. LLpr Based on the foregoing, you now request, for and in behalf of Ms. Modesta R. Sabeniano, et. al., for a refund of the capital gains tax paid in the amount of P906,345.00. In reply, please be informed that after a careful study of the facts of the case as well as the law and jurisprudence applicable thereto, we find your claim to be without any legal and factual basis. 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 prevailing at the time of sale, whichever is higher. The phrase "including pacto de retro sales and other forms of conditional sales" necessarily includes a mortgage foreclosure sale under Act 3135 as amended by Act No. 4118 (Revenue Memorandum Order No. 29-86, as amended by Revenue Memorandum Order No. 6-92). Based on the foregoing provision of the Tax Code, it is clear that a mortgage foreclosure sale is subject to the 5% capital gains tax. The subsequent redemption of the property subject to a pacto de retro sale is not embraced therein meaning the redemption is not subject to the 5% capital gains tax imposed under Section 21(e) of the Tax Code, as amended. In extra-judicial foreclosure sales under Act No. 3135 as amended by Act No. 4118, the creditor-financial institution (bank, finance and insurance companies) is the statutory seller representing the owner-mortgagor of the real property. It becomes liable for the payment of the capital gains tax due on such foreclosure sale based on the bid price in the auction sale. However, it 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. This reimbursement/recovery of the capital gains tax paid by the creditor-financial institution mentioned in the said memorandum order pertains to the recovery of the capital gains tax paid from the debtor-mortgagor or any party whatsoever if the right of redemption is exercised and it does not refer to the Bureau of Internal revenue. The reimbursement/recovery is in the form of inclusion of the capital gains tax paid by the bank/financial institution as part of the redemption price. It does not refer to a reimbursement of the capital gains tax paid from the Bureau of Internal Revenue since a mortgage foreclosure sale is a form of conditional sale which is subject to 5% capital gains tax under Section 21(ed) of the Tax Code, as amended. cdta Accordingly, your claim is hereby denied for lack of legal basis. This constitutes our final decision on the matter. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue