Exemption from 5% Capital Gains Tax

June 9, 1989 BIR RULING NO. 124-89 21 (e) 000-00 124-89 S i r : This refers to your letter dated May 25, 1989 stating as follows: "We, Antonio, Eugenio, Salvador, Virgilio, Engracia, Julieta and Tito all surnamed David and all of legal age and married are co-owners of a residential lot located at 772 San Bartolome, Quirino Highway, Novaliches, Quezon City, consisting of 2,000 sq.m. more or less, and covered by TCT No. 209404 inherited from our deceased mother, Francisca Dizon David who died on July 18, 1978. The corresponding estate tax on the transmission of the property to the heirs has been duly paid. "As some of the heirs were in need of money to defray family expenses we entertained then the idea of mortgaging the property in a financing institution. However, on second thought, we deemed it best to first segregate a portion from the property and have it titled in the names of the heirs in need of such cash. "Accordingly, we had the property surveyed, and after having complied with the requirements of the law, TCT No. 209404 was cancelled and in lieu thereof four (4) TCTs were issued on June 6, 1984 in accordance with the partial Extra-Judicial Partition executed by the heirs, as follows: TCT No. 317035 Registered in the name of Engracia David, comprising of 206 sq.m. more or less; TCT No. 317036 Registered in the name of Salvador David, comprising of 299 sq.m. more or less; TCT No. 317037 Registered in the name of the remaining heirs, viz: Antonio David, Eugenio David, Virgilio David, Julieta David and Tito David, comprising of 1,378 sq.m. more or less; TCT No. 317038 (Alley) Registered in the names of the legal heirs with an area of 117 sq.m. more or less. "Unexpected, our sister Engracia David, the heir in whose behalf we caused a partial partition of the property, went to the U.S.A. as immigrant together with her family. So much so our intention of mortgaging TCT No. 317035 which was registered in her name, had to be abandoned. "We have now decide to have the whole property resurveyed with the end in view of consolidating the aforementioned TCTs Nos. 317035, 317036 and 317038 to the mother title (TCT No. 317037) whereby the names of all the heirs, like before, appear therein as co-owners. Our purpose is to avoid any heir of disposing any portion of the property. We intend to preserve the same as a remembrance from our deceased parents." In connection therewith, you now request a ruling as to whether the consolidation of the individual titles of aforementioned parties into a single title again is subject to the capital gains tax. In reply thereto, please be informed that under Section 21(e) of the Tax Code, as amended, 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 or 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. Such being the case, and considering that there is no actual transfer of ownership over the property adverted to in this case and that the aforementioned parties will not realize any capital gains as a result of the re-consolidation of their individual titles into the original single (mother) title, you and your co-heirs are not subject to the 5% capital gains tax. Moreover, said re-consolidation did not also result in the formation of an unregistered partnership for purposes of the corporate income tax under Section 24(a) of the Tax Code. It has been held that unregistered partnerships subject to corporate income tax must be engaged in joint venture for profit . (Oblillos vs. Commissioner, G.R. No. 68118, Oct 29, 1985) To constitute said unregistered partnership, the character of habituality peculiar to business transactions for the purpose of gain must be present. (Mariano P. Pascual and Renato P. Dragon vs. Commissioner, G.R. No. 78133, October 18, 1988) In the instant case, the intent of the heirs to reconsolidate is not for profit but to preserve the entire property as a remembrance from their deceased parents. In the case of De Leon vs. Commissioner, CTA Case No. 738 Sept. 11, 1961, the Tax Court ruled that since the actions of the heirs were limited to the conservation and preservation of the inherited properties, no taxable unregistered partnership has been formed. The same ruling is found in the case of Longa vs. Aranas, CTA Case No. 653, July 31, 1963 which is fundamentally similar to the De Leon Case. We find these Tax Court rulings to be applicable to the instant case. Very truly yours, (SGD.) JOSE U. ONG Commissioner