Taxability of the Transfer of Interest in a Partnership for a Consideration

May 8, 1992 BIR RULING NO. 147-92 50 (b) 000-00 147-92 Atty. Venus T. Buado 12th Floor, Ramon Magsaysay Center Roxas Blvd., 1000 Ermita, Manila M a d a m : This refers to your letter dated August 8, 1991 stating that Conrado Y. Simon ("Simon") owns 20% interest in a partnership, known as G.P. and Company ("GP"); that on September 23, 1988, Simon sold his entire 20% interest in GP to Patrick C. Parsons ("Parsons") in consideration of the following: "1. Parsons shall pay Simon P335,000.00 cash which represents the sum advanced by Simon to GP for the acquisition of a real property in Quezon City, covered by Transfer Certificate of Title No. RT8503(49538) referred to as the QC Property. "2. Additionally, Parsons undertook to have the title to the QC property registered in the name of Simon. All taxes and registration costs, however, shall be borne by Simon. "3. Should Parsons fail to have the title to the QC property transferred to Simon (for causes other than non-payment of taxes and registration costs), Parsons shall pay Simon the additional sum of P2,699,200.00 cash." cdta that the above-described transfer is contained in the Deed of Assignment which the parties executed on September 23, 1989; that per TCT No. RT 8503(49538), the title over the QC property, which Parsons undertook to be transferred in Simon's name, presently appear in the name of Edward M. Grimm, already deceased; that on various dates in 1988, the heirs of Edward M. Grimm, (EMG) executed a deed of Partition containing a quit claim of interest in several properties, including the Q.C. property in favor of G.P.; that in the said Deed of Partition, the heirs of EMG declared the following: "a) EMG held title to the QC property and other real properties specifically described therein as an implied trustee for and in behalf of GP, the beneficial owner. "b) Funds of GP were used to purchase the said real properties. "c) The heirs of EMG thereby transferred full legal title over the said real properties in favor of GP as the absolute owner thereof." that before the property can be transferred to GP from EMG and from GP to Simon, the Register of Deeds for Quezon City is requiring a Certificate of Tax Clearance and proof of payment of estate tax; and that you are of the opinion to the effect that based on aforestated set of facts the estate of EMG is not subject to the estate tax inasmuch as the Q.C. property did not belong to his estate as manifested by his heirs in the Deed of Partition they executed on Various date in 1988; neither is the transfer affected by the heirs on the Deed of Partition subject to capital gains tax as the same may be considered analogous to such situation where no transfer of title to real property really took place, hence, no capital gains tax liability arise (BIR Ruling No. 178-90, dated September 17, 1990); and lastly, that the same is not subject to documentary stamp tax since the same partakes of a conveyance of realty not in connection with sale to trustees or other persons and without consideration. Based on the foregoing representations you now in effect request a ruling whether or not the transfer from EMG to GP necessitates the payment of estate tax, capital gains tax and documentary stamp tax and what are the taxes to be paid on the transfer from GP to Simon? In reply, please be informed that under Section 78 of the Tax Code, as amended, the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated; Provided , however , that in the case of non-resident decedent who at the time of his death, was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. Accordingly, and inasmuch as the heirs of Edward M. Grimm in whose name the Q.C. property covered by TCT No. 8503 (49538) is presently registered executed on various dates in 1988 a Deed of Partition containing a quit-claim of interest in several properties, among which is the said Q.C. property, this Office is of the opinion that the QC property which Mr. Patrick C. Parsons undertook to transfer to Mr. Conrado Y. Simon is not in fact part of the Estate of the decedent Edward M. Grimm and therefore the same is not subject to the Estate Tax imposed under Section 77 of the Tax Code, as amended, considering that under Section 3 (6) of Rule 131 of the Rules of Court among the instances of conclusive presumptions is whenever a party has, by his own declaration act, or omission, intentionally and deliberately, led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. Moreover, the transfer of the Q.C. property effected by the heirs of the Estate of Edward M. Grimm in the Deed of Partition in favor of GP and Company, is not subject to the capital gains tax imposed under Section 21(e) of the Tax Code since the transfer of the title in favor of GP and company is merely a formality of transferring to the beneficial owner thereof the title to the same and in order that the title to the said property may be registered in the name of its rightful owner without any monetary consideration. Furthermore, the Deed of Partition whereby the heirs of the decedent Edward M. Grimm transferred the QC property in favor of GP and company having no monetary consideration is not likewise subject to the documentary stamp tax imposed under then Section 196 of the Tax Code, as amended. Finally, under paragraph 3 of Revenue Memorandum Circular No. 34-91 dated April 8, 1991, so as to stop further losses of revenue due to the ante-dating of Deed of Sale/Transfer involving real property in order to avoid or reduce the tax liability on such transactions, henceforth, public instruments transferring real properties presented to the appropriate revenue official beyond three (3) months from the date of notarization shall be considered as ante-dated and the tax liabilities of the parties shall be determined in accordance with the rules and regulations obtaining at the time such documents are presented to the BIR. In this connection, paragraph 2 (b) of Revenue Memorandum Circular No. 43-91 provides that when the document is presented to the BIR after three (3) months from the date of notarization, and the taxpayer cannot present additional receipts or documents to show that the same is not ante-dated, then the rules applicable at the time of presentation of the document shall be applied but no penalty shall be imposed. It is expected that by applying the current rules, a higher tax will be collected from the taxpayer than when the old rules plus penalties have been followed. Such being the case, and since the document evidencing the transfer of GP and company of the QC property in favor of Mr. Conrado Y. Simon was presented to this Office after three (3) months from its notarization on September 23, 1988, this Office is of the opinion and hereby holds that the transfer of GP and company of the QC property covered by TCT No. RT 8503 (49538) in favor of Mr. Conrado Y. Simon on September 23, 1988 is subject to the 5% creditable withholding tax prescribed under Revenue Regulations No. 1-90 implementing Section 50 (b) of the Tax Code, as amended, and to the 1% documentary stamp tax imposed under Section 196 of the same Code. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue By: EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge