BIR Ruling No. 148-84

September 5, 1984 BIR RULING NO. 148-84 34-h-269-81-148-84 Gentlemen : This refers to your letter dated July 23, 1984 stating that your client, Doa Mercedes McMicking together with her co-partners in Ayala y Compania, a duly organized partnership sold at cost (book value) several parcels of land all described in the Deed of Sale executed and acknowledged before a notary public on February 14, 1957 by and between Ayala y Compania as vendor and Makati Development Corporation (now Ayala Corporation) as vendee; that the consideration of the sale or selling price of the parcels of land is their total book cost of P1,903,754.02 plus a contingent percentage based on 30% of the gross resale price of the land to third parties by the vendee, stated in the said Deed of Sales as follows: "NOW THEREFORE, for and in consideration of the foregoing and of the sum of ONE MILLION NINE HUNDRED THREE THOUSAND AND SEVEN HUNDRED FIFTY FOUR & 02/100 PESOS (P1,903,754.02), lawful currency of the Philippines, receipt of which is hereby acknowledged by the VENDOR from the VENDEE and, in further consideration of future payments to be made by the VENDEE to the VENDOR based on 30% of the gross selling price of the land to third parties, the VENDOR hereby SELLS, CEDES, CONVEYS and DELIVERS, with full warranty of a legal and valid title as provided for by law, subject to such liens and encumbrances as may be appearing on the corresponding certificate of title, unto the VENDEE, its successors and assigns, all of the thirty (30) parcels of land which are listed and described in the list of properties marked Annex "A" hereof, . . ." that the initial payment of P1,903,754.02 received by the partnership is way below 25% of the total consideration, even if only reckoned with payments received to date; that in accordance with the terms and conditions of the sale, your client, since 1957 up to the present, has been receiving her share of the 30% of the collection Ayala Corporation makes on its sale of the properties plus increments (interest, etc.); that from February 14, 1957 to September 6, 1979 immediately prior to the enactment of Batas Pambansa Blg. 37 which took effect on September 7, 1979, your client had been reporting the capital gains on her share of the 30% under Section 34(b) of the Tax Code and paying income taxes thereon under Section 21 of the same Code. Based on the foregoing representations, you now request a ruling as to whether or not the provisions of B.P. Blg. 37, e. g., on the rate of tax, shall apply to the capital gains realized by your client from the said 30% share starting September 7, 1979 up to the present. In reply, please be informed that in a letter dated June 15, 1978 to Ayala Corporation, this Office ruled that the above transaction executed on February 14, 1957 is a sale of undeveloped land; that the parties to the transaction and their assignees and successors did not undertake a joint venture; and that the profits derived from the transaction constituted capital gains. It should be noted that the effectivity of B.P. Blg. 37 depends on the date the deed of conveyance was acknowledged before a notary public (Sec. 8, Revenue Regulations No. 8-79 implementing B.P. Blg. 37). Hence, if the deed was acknowledged before September 7, 1979, the provisions of Batas Pambansa 37 will not be applied (BIR Ruling dated November 9, 1979). Accordingly, with respect to the capital gains realized by your client from February 14, 1957 to September 6, 1979, or before B.P. Blg. 37, your client correctly reported the gains on her share of the 30% under Section 34(b) of the Tax Code and paid the income taxes thereon under Section 21 of the same Code. As regards the capital gains realized by your client starting September 7, 1979 up to to present, if as represented, said gains adverted to in your inquiry are realized from the contingent additional consideration based on 30% of Ayala Corporation's gross selling price of the aforesaid lands sold to third parties which obviously are covered by Deeds of Sales executed and acknowledged before a notary public after September 7, 1979, the said gains are returnable and subject to the final schedular capital gains tax prescribed by Section 34(h) of the Tax Code as amended by Batas Pambansa Blg. 37 and implemented by Revenue Regulations No. 8-79. It is hereby understood that this ruling shall be revoked if, after investigation, it is ascertained that the facts upon which the same is based are different from those represented. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner