Union Bank Can Claim Tax Refund/Credit on Capital Gains Tax and Documentary Stamp Tax Paid on an Invalid Foreclosure Sale

November 5, 1996 BIR RULING NO. 119-96 204; 21 (e) 000-00 119-96 Joaquin Cunanan & Co. 8th Floor. BA-Lepanto Building 8747 Paseo de Roxas Makati City Attention: Ms . Tomasa H . Lipana Managing Partner Tax and Corporate Services Gentlemen : This refers to your letter dated June 18, 1996 requesting for confirmation of your opinion that Union Bank of the Philippines (UBP) can claim tax refund/credit on capital gains tax and documentary stamp tax paid on an invalid foreclosure sale having been conducted during the pendency of a temporary restraining order issued by the Pasig Regional Trial Court. It is represented that on February 11, 1993. Spouses Rockwell Perfecto and Ma. Concepcion Gohu mortgaged their real property (land with improvements) located at 703 Buffalo Street, Wackwack Village, Mandaluyong City and covered by Transfer Certificate of Title No. 1595, in favor of UBP to secure the loan obtained by them; that due to the failure of the Spouses to pay the said indebtedness, a public sale of the Spouses mortgaged property was scheduled on December 20, 1995; that, on December 18, 1995, however, the Regional Trial Court (RTC) of Pasig under the Honorable Martin S. Villarama issued a Temporary Restraining Order (TRO) prohibiting the foreclosure sale of the above property; that despite the said prohibition, UBP proceeded with the scheduled foreclosure sale on December 20, 1995 for which it submitted the highest bid, and consequently paid the capital gains tax and documentary stamp tax on such sale considering that in an extrajudicial foreclosure sale, the bank is the statutory seller representing the owner mortgagor of the real property and becomes liable on the bid price in the auction sale; but that later on, UBP decided to unilaterally withdraw and abandon the registration of the Certificate of Sale of the mortgaged property with the Register of Deeds of Mandaluyong City; that as a consequence, the Spouses executed an irrevocable and unconditional assignment of the payments of the capital gains tax and documentary stamp tax on the foreclosure sale in favor of UBP. In reply, please be informed that the foreclosure sale made by the Union Bank of the Philippines of the mortgaged property of the Spouses Rockwell Perfecto and Ma. Concepcion Gohu is not valid because the same was made during the pendency of a Temporary Restraining Order issued by the Regional Trial Court of Pasig. Besides, the act of the Bank of unilaterally withdrawing and abandoning the registration of the Certificate of Sale with the Registry of Deeds of Mandaluyong City further bolsters the fact that no sale indeed had been validly perfected or consummated. It should be noted that capital gains tax is imposed only on capital gains realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets. This, however, is not true in the instant case. In view thereof, there being no valid foreclosure sale exchange or disposition of the real property of the subject Spouses, UBPs foreclosure sale on December 20, 1995 is not subject to the capital gains tax imposed under Section 21 (e) of the Tax Code, as amended, nor to the documentary stamp tax imposed under Section 196 of the same Code. (BIR Ruling No. 9-95 dated January 16, 1995) Accordingly, being the statutory seller of the subject property, the Union Bank of the Philippines is entitled to a refund/credit of the aforesaid taxes provided that the Bank files a written claim thereof with the Appellate Division, BIR National Office Building, Diliman, Quezon City within two (2) years after the payments of the taxes and upon presentation of proofs that the same have been actually paid but that the foreclosure sale made by it is not valid. cdta Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue