BIR Ruling No. 081-10

September 27, 2010 BIR RULING NO. 081-10 Regional Director Revenue Region No. 13 Cebu City Sir : This refers to your Endorsement dated April 20, 2009 wherein you referred to our office the request of Development Bank of the Philippines (DBP) for exemption from the payment of capital gains and documentary stamp taxes, on the Deed of Transfer executed on December 21, 2007, over a parcel of land containing an area of 189 sq. m., more or less, located at Poblacion, Tagbilaran City, Bohol, in favor of their employee, Mr. Elias A. Buno. It appears that Mr. Buno, a permanent employee of DBP, availed of the Individual Housing Program (IHP) for the bank's employees; that under the said program, Mr. Buno secured an advance from DBP for an amount of P85,000.00; that the proceeds of this advance shall be used for the acquisition of a residential house and lot and improvement of the residential house in accordance with the terms and conditions of the IHP; that under the terms of the IHP, the title to the property subject of the loan is required to be placed in the name of the bank, with DBP simultaneously executing a Deed of Conditional Sale/Agreement in favor of the Mr. Buno; and that after the employee has fully paid the loan, the real property shall then be transferred in the name of the employee. DBP now requests that the transfer of the real property from the bank to Mr. Buno be exempt from capital gains tax as the agreement entered into is a mere contract of loan. It argues that the real owner of the property is Mr. Buno and that the title to the property was registered in the name of DBP only to secure the loan. It claims that the bank and its employee entered into an equitable mortgage, hence the transfer of title to its employee should be exempt from capital gains tax. In reply, please be informed as follows: aCSEcA Article 1602 of the New Civil Code, which introduced the concept of equitable mortgage, was discussed by the Supreme Court in the case of Santos v. Duata, G.R. No. L-20901, August 31, 1965, to wit: "Article 1602 is a new provision in the Civil Code designed primarily to curtail the evils brought about by contracts of sale with right of repurchase, such as the circumvention of the usury law and pactum commissorium. It particularly envisions contracts of sale with right of repurchase where the real intention of the parties is that the pretended purchase price is money loaned, and in order to secure the payment of the loan a contract purporting to be a sale with pacto de retro is drawn up." The Supreme Court further explained that an equitable mortgage is one which, although lacking in some formality, or form, or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law. The essential requisites of an equitable mortgage are: (1) the parties enter into what appears to be a contract of sale, (2) but their intention is to secure an existing debt by way of mortgage. (Rockville Excel International Exim Corporation vs. Spouses Oligario Culla and Bernardita Miranda, G.R. No. 155716, October 2, 2009) It should be noted that although the employee secured a loan from the bank, he did not sell or mortgage any real property to the latter in order to secure the obligation. The employee could not have sold or mortgaged the real property to the bank because he did not own the same. Clearly, the transaction entered into by the bank and its employee is not an equitable mortgage. In view of the foregoing, this Office denies the request of DBP for exemption from payment of capital gains and documentary stamps taxes the Deed of Transfer dated December 21, 2007 executed by DBP in favor of Mr. Elias A. Buno. DCAEcS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue