Taxability of the "Deed of Redemption"

March 25, 1988 BIR RULING NO. 121-88 21 (e) 000-00 121-88 S i r : This refers to your letter dated March 9, 1988 requesting a ruling on whether or not a "Deed of Redemption" is subject to capital gains tax and documentary stamp tax. It is represented that on July 19, 1978, Messrs. Archimedes Laurel and Teodoro Laurel, for themselves and as attorney-in-fact of their brothers and sisters got a loan of P190,000.00 from United Coconut Planters Bank at 12% interest secured by a real estate mortgage of a parcel of land covered by TCT No. T-75125 situated in the Province of Quezon; that on May 12, 1986, for failure to pay the said loan on its due date, the mortgage was foreclosed and the mortgaged property was sold for P220,033.66 to the United Coconut Planters Bank as the highest bidder; that the Certificate of Sale was issued by the Provincial Sheriff and approved by the Executive Judge; that United Coconut Planters Bank registered the said Certificate of Sale with the Register of Deeds on August 6, 1986 without the prepayment of the corresponding capital gains tax; that on July 10, 1987, before the expiration of the one (1) year period (from August 6, 1986 to August 6, 1987) within which the vendor-debtors could redeem the mortgaged property, United Coconut Planters Bank as mortgagee-vendee assigned its right over the mortgaged property to Ms. Encarnacion Laurel-Loewen in consideration of the sum of P254,160.02; that by this transaction Ms. Encarnacion Laurel-Loewen stepped into the shoes of United Coconut Planters Bank as mortgagee of the mortgaged property, that on October 26, 1987, the original debtors Messrs. Archimedes Laurel and Teodoro Laurel, and their brothers and sisters paid the amount of P254,160.02 as redemption price to Ms. Encarnacion Laurel-Loewen who executed a "Deed of Redemption" in favor of the aforesaid original debtors of United Coconut Planters Bank; and that the "Deed of Redemption" is now being registered with Registered of Deeds, for the lifting of the encumbrance. aisadc In reply, please be informed that RMO. No. 33-81 as amended by RMO No. 18-82 allowed the issuance of a Certificate authorizing the transfer of title to real property classified as capital asset even before payment of the capital gains tax if foreclosed by a bank, finance or insurance company thru a foreclosure sale. However, RMO No. 29-86 dated September 3, 1986 which revoked RMO No. 33-81 as amended by RMO No. 18-82 provides that no certificate authorizing transfer of title to real property classified as capital asset sold by an individual thru foreclosure sale shall be issued without prepayment of capital gains tax including the documentary stamp tax. Considering, however, that RMO No. 29-86 applies to real property purchased by bank, finance and insurance company thru mortgage foreclosure sale on or after September 3, 1986, the sale of the mortgaged property of your aforesaid clients in favor of United Coconut Planters Bank as highest bidder in the public auction sale conducted by the Provincial Sheriff of Quezon at Lucena City acting through the Deputy Sheriff on May 12, 1986 is therefore, covered by RMO No. 33-81 as amended by RMO No. 18-82. (BIR Ruling No. 313-87) Moreover, the assignment by United Coconut Planters Bank of its right over the mortgaged property to Ms. Encarnacion Laurel Loewen in consideration of the sum of P254,160.02 on July 10, 1987 or prior to the expiration of the one year period within which your aforementioned clients could redeem said mortgaged property is not subject to capital gains tax, since only individuals including estates and trusts are liable to pay said tax. However, any gain derived by Coconut Planters Bank from the said sale should be declared by it in its 1987 corporate income tax return. (BIR Ruling No. 10-87) Furthermore, the "Deed of Redemption" executed by Ms. Encarnacion Laurel-Loewen in favor of your said clients in consideration of the sum of P254,160.02 on October 26, 1987, is likewise not subject to capital gains tax, since your aforementioned clients are merely exercising their right of redemption under Act 3135 as amended by Act 4118 aside from the fact that there is no transfer of title to real property involved in the case. Finally, the Deed of Real Estate Mortgage, Sheriff's Deed of Sale, Deed of Assignment and Deed of Redemption executed by the parties referred to in this case are subject to documentary stamp tax based on the consideration or value received or paid for the property as stated on said Deeds pursuant to Sections 195 and 196 of the Tax Code, as amended. cdtech Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner