Request for Exemption from Capital Gains Tax on Sale of Parcel of Land to the City of Marikina

July 13, 1999 BIR RULING NO. 102-99 24 (D) (1) RMO 41-91-000-00-102-99 Office of the Mayor Marikina City Attention: Mr . Melvin A . Cruz City Administrator Gentlemen : This refers to your letter dated June 10, 1998 stating that the City Government of Marikina purchased a 354 sq. m. land from Dr. Edilberto Villon to connect it with the 2,062 sq. m. road right-of-way property donated to the City Government by Heritage Consolidated Assets, Inc.; that the said transaction enabled the local government to implement the extension of 3 rd Street in Sto. Nio of the said city to alleviate the traffic problem along Sumulong Highway and P. Antonio St.; and that one of the provisions in the Deed of Sale was for the City Government to shoulder all taxes and expenses necessary to effect the transfer of title over the subject property. Based on the foregoing, you now request for exemption from capital gains tax on the sale of Dr. Edilberto Villon of his parcel of land in favor of the City of Marikina. In reply, please be informed that in all cases involving sale, exchange, or any disposition of real property, classified as capital assets, including pacto de retro sales and other forms of conditional sales, located in the Philippines, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, shall be imposed upon capital gains presumed to have been realized pursuant to Section 24(D)(1) of the same Code. Provided, that the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or-controlled corporations shall be determined either under Section 24(A) or under this Subsection, at the option of the taxpayer. However, in cases where the State or any of its instrumentalities in the exercise of its power of eminent domain, acquires through expropriation proceedings, private real property for public use upon payment of "just compensation" to the owner, the actual consideration appearing in the Deed of Sale shall be an acceptable tax base in the computation of not only the capital gains tax but also of the documentary stamp tax as enunciated in Revenue Memorandum Order No. 41-91. Verily, the case at bar partakes the nature of an exercise of eminent domain of an instrumentality of the State. Furthermore, Section 196 of the Tax Code of 1997 provides that when one of the contracting parties is the Government, the documentary tax herein imposed shall be based on the actual consideration. Accordingly, both capital gains tax and documentary stamp tax shall be computed based on said "just compensation" as actual consideration. Such being the case, we regret to deny your request for lack of legal basis. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue