5% Capital Gains Tax on Execution Sale

May 2, 1989 BIR RULING NO. 091-89 21 (e) 000-00 091-89 S i r : This refers to your letter dated January 9, 1989 requesting in behalf of your client, Capt. William A. Arroyo, plaintiff in Civil Case No. Q-30436, RTC-QC., Br. 89, entitled "William A. Arroyo, Plaintiff, vs. Ester Chan, defendant," exemption from the payment of capital gains tax of the Execution Sale of the real property covered by TCT No. N-51965 belonging to the defendant, Ester Chan, to satisfy the judgment rendered in the aforesaid case, for the following reasons: "a) Unlike foreclosure of mortgages arising from contract, the instant case is an involuntary sale provided by law as legal remedy to enforce and/or satisfy a court judgment; "b) There is no consideration of gain or profit in the conveyance, the auction sale being merely an ancillary remedy to the civil case. The property is conveyed, not by the owner directly but the sheriff, irrespective of the will of the owners, in most cases at a loss to the owner; and "c) To impose a capital gains tax on the execution sale would indirectly result in a reduction of the judgment sum awarded by a court of justice to parties in a civil case. This is tantamount to the judiciary being subordinated to the B.I.R." In reply, please be informed that your request is hereby denied. Section 21(e) of the Tax Code, as amended provides, viz: "Section 21(e) Capital Gains from Sales of Real Property . The provisions of Section 33(b) notwithstanding, 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. . . . ." (Emphasis supplied) Accordingly, execution sale like expropriation sale is subject to the 5% capital gains tax regardless of whether any gain or profit was derived therefrom since the aforecited law is comprehensive enough to cover not only voluntary sale but also involuntary sale as in the instant case. Moreover, your contention that the imposition of the 5% capital gains tax would indirectly result in a reduction of the judgment sum awarded by a court of justice to parties in a civil case and therefore, is tantamount to the judiciary being subordinated to this Office is without merit since Section 30 of Rule 39 of the Rules of Court specifically recognizes the payment of taxes by the purchaser in an execution sale after the purchase. Very truly yours, (SGD.) JOSE U. ONG Commissioner