Reconveyance of Foreclosed Properties to Original Owner Not Subject to CGT and DST

July 7, 1999 BIR RULING NO. 090-99 R.A. 7202-27 (D) (5)-119-96-090-99 Mr. Themistocles R. Montalban Neptune Street, Bahay Toro Quezon City S i r : This refers to your letter dated December 5, 1997 requesting on behalf of Mr. Horacio Borromeo ("Mr. Borromeo") for a ruling that the reconveyance of the foreclosed properties to the original owner pursuant to the mandate of R.A. 7202 which extends the payment of the crop loans which effectively allowed the redemption of the property already foreclosed as a result of non payment, is exempt from documentary stamp tax and capital gains tax. llcd It is represented that during the crop years 1974-1975 and 1984-1985, Mr. Borromeo was extended sugar crop loan by the Philippine National Bank (PNB) in the amount of P404,145.62; that the same was secured by parcels of land covered by TCT Nos. 7793, 7799, 3866 and 12115 and evidenced by a real estate mortgage, credit agreement, deed of assignment, special power of attorney and promissory note; that on various dates, Mr. Borromeo made partial payment in the aggregate amount of P337,283.76; that on March 17, 1986, the outstanding balance of the crop loan amounted to P897,533.33; that for failure to settled the said outstanding sugar crop loan, PNB initiated foreclosure proceedings for which an auction sale was conducted on February 11, 1987; that for lack of bidders, PNB, as the highest bidder, altogether acquired the mortgaged properties; that after the lapse of the one-year period of redemption, title to the said properties was consolidated in the name of PNB; that on February 29, 1992, the Government enacted R.A. No. 7202, otherwise known as "Sugar Restitution Law" which mandates restitution of the losses suffered by the sugar producers in order to revive the economy of the sugar producing areas of the country; that because of the said policy, the government financial institutions, i.e. , PNB, RPB, DBP, etc. which granted loans to sugar producers were required to extend the accounts of sugar producers incurred from crop year 1974-1975 and up to crop year 1984-1985; that among the conditions required by RA 7202 are as follows: "1) Condonation of interest charged by the banks in excess of twelve percent (12%) per annum and all penalties and charges. "2) The recomputed loans shall be amortized for a period of thirteen (13) years inclusive of a three year grace period on principal effective upon approval of this Act. The principal portion of the loan will carry an interest rate of twelve percent (12%) per annum and on the outstanding balance effective when the original promissory notes were signed and funds released to the producer." that upon compliance of the above requirement, PNB executed a Deed of Reconveyance returning the foreclosed properties already consolidated in its name to Mr. Borromeo; that by virtue of said RA 7202, the consolidation of title in favor of PNB as a consequence of foreclosure is deemed abrogated thereby allowing the debtor, Mr. Borromeo, to pay the crop loans with the bank including the interest; and that this policy is adopted by the Government because the failure of the debtor-borrowers to pay their crop loans was due to the failure of the government agency that handled the marketing of sugar to pay the sugar producers. In reply, please be informed that by virtue of R.A. No. 7202 the foreclosed sales made by the Philippine National Bank, the Republic Planters Bank, the Development Bank of the Philippines and various government financial institutions over the mortgaged properties securing crop loans taken for years 1974-1975 to 1984-1985 by the sugar planters (as debtor-mortgagors) were deemed abrogated when the loans granted to the latter were effectively extended. The mandate of the said Act to extend payment of the loan granted to the debtor-mortgagor had ultimately resulted in the reconveyance of the foreclosed properties to the debtor-mortgagor and the restoration of the legal title over the properties in their name. Such being the case, such reconveyance is not subject to the capital gains tax imposed under Sec. 27(D)(5) of the Tax Code of 1997 [subject to then creditable withholding tax under then Sec. 24(a), in relation to Sec. 50(b), both of the Tax Code, as amended] nor to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 (also Sec 196 of the Tax Code of 1997). Moreover, while there was a valid foreclosure sale that had transpired at that time but on account of subsequent abrogation of the same by mandate of the said RA 7202, it is undeniable that the foreclosure was revoked by operation of law. The intention of the Government to restitute the losses suffered by the sugar planters was manifested when it had deemed it wise to abrogate the foreclosure sale through the enactment of the aforesaid law. Essentially, therefore, RA 7202 retroactively nullified the foreclosed sales through extension of loans, condonation of interest charged by the banks in excess of 12% per annum and the recomputation and amortization for another thirteen (13) years of said loans, it being admitted by the Government that the losses suffered by the sugar planters during the crop years 1974-1975 to 1984-1985 were due to fault/inaction on the part of the government agencies that had direct recourse in avoiding the losses. Such being the case, the reconveyance of the foreclosed properties to the original owner pursuant to the mandate of RA 7202, is not subject to the capital gains tax imposed under then Section 21(e) of the Tax Code, as amended (now Sec. 27(D)(5) of the Tax Code of 1997) nor to the documentary stamp tax imposed under then Section 196 of the same Code (also Section 196 of the Tax Code of 1997) [BIR Ruling No. 9-95 dated January 1995]. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue