BIR Ruling No. 093-12

February 16, 2012 BIR RULING NO. 093-12 RA 7279; RA 7160; 000-00 Nerizza Nicolas-Enriquez Unit 1106 Burgundy West Bay Tower 820 Pablo Ocampo St. Malate, Manila Madam : This refers to your letter dated August 16, 2011, which was referred to this Office by Revenue Region No. 6, Manila, by way of 1st Indorsement dated August 26, 2011, requesting for an exemption from the payment of capital gains tax on the involuntary sale of a parcel of land to the City of Manila for its socialized housing project under Republic Act (RA) No. 7279, otherwise known as the Urban Development and Housing Act of 1992, as implemented by Revenue Regulations No. 11-1997, as amended by Revenue Regulations No. 17-2001. It is represented that Alicia P. Nicolas married to Jose Nicolas, is the absolute registered owner of a parcel of land identified as Lot 4-B of the subdivision plan Psd-04-003127, being a portion of Lot 4, Block 3009 covered by Transfer Certificate of Title (TCT) No. 1-155272 issued by the Registry of Deeds for the City of Manila, containing an area of four hundred eighty eight square meters and ninety seven decimeters (488.97 sq. m.) more or less; that on February 17, 2009, a Decision was rendered by the Regional Trial Court of Manila, Branch 32 expropriating the said parcel of land pursuant to City of Manila Ordinance expropriating the subject property for the purpose of awarding the said property to qualified and bonafide occupants thereat pursuant to the Land for the Landless and socialized housing program of the City of Manila and became final and executory on April 21, 2009; that in the same decision the Court issued an order fixing the just compensation in the amount of eight thousand five hundred fifty four and fifty centavos (P8,554.50) per square meter; that on March 4, 2010 the plaintiff, through the Urban Settlements Office of Manila, paid the amount of P2,928,026.00 representing the 70% city's share in the just compensation; and that on August 22, 2011, the Urban Settlements Office declared that the property shall be resold at cost to its actual and bonafide occupants under the Land-for-the Landless Program and Socialized Housing Program and On Site Development Program of the City of Manila under City Ordinance No. 7974, 1999. DaESIC In reply thereto, Section 19 of Republic Act No. 7160 provides the basis for the exercise of the power of eminent domain of local government, which provides that: "SEC. 19. Eminent Domain . A local government unit may, through its chief executive and acting pursuant to an ordinance, exercise the power of eminent domain for public use, or purpose or welfare for the benefit of the poor and the landless, upon payment of just compensation, pursuant to the provisions of the Constitution and pertinent laws: Provided, however, That the power of eminent domain may not be exercised unless a valid and definite offer has been previously made to the owner, and such offer was not accepted: Provided, further, That the local government unit may immediately take possession of the property upon the filing of the expropriation proceedings and upon making a deposit with the proper court of at least fifteen percent (15%) of the fair market value of the property based on the current tax declaration of the property to be expropriated: Provided, finally, That, the amount to be paid for the expropriated property shall be determined by the proper court, based on the fair market value at the time of the taking of the property." As an instrumentality of the government, a local government unit, which acts for the purpose of accomplishing government policies and objectives and extending essential services to the people, performs governmental and not proprietary functions. ( Peoples' Homesite and Housing Corporation vs. Court of Industrial Relations , 150 SCRA 296, 310 (1987)) Thus, in line with the foregoing, it is a declared State policy as laid down in Republic Act No. 7279, otherwise known as the "Urban Development and Housing Act of 1992", to provide decent and affordable housing to the underprivileged and homeless citizens. Moreover, the pertinent portion of Section 20 of RA No. 7279, reads: "Sec. 20. Incentives for the Private Sector Participating in Socialized Housing . To encourage greater private sector participation in socialized housing and further reduce the cost of housing units for the benefit of the underprivileged and homeless, the following incentives shall be extended to the private sector: xxx xxx xxx "(d) Exemption from the payment of the following: (1) . . . (2) Capital gains tax on raw lands used for the project; xxx xxx xxx" Pursuant to the aforementioned provision, the owner of the raw land is exempt from the payment of capital gains tax on the conveyance although involuntarily of the above-described property in favor of the City of Manila for use in its socialized housing project. Upon application for exemption, a lien on the title of the land shall be annotated by the Register of Deeds having jurisdiction over the property, to the effect that the same is to be applied or is being applied to socialized housing project pursuant to R.A. 7279. However, the sale is subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration or the fair market value, whichever is higher. ISHCcT This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue