Whether Acquisition Cost May Be Used as Basis in Computing CGT/Withholding Tax and DST on Transfer of "Road Lot"

October 19, 1998 BIR RULING NO. 150-98 000-00-150-98 Baniqued & Baniqued Suite 803, B/F Jollibee Center San Miguel Avenue Ortigas Center Pasig City Attention: Attys . Carlos G . Baniqued and Evita Cantillep-Caballa Gentlemen : This refers to your letter dated February 19, 1998 requesting on behalf of your client, Standard Electric Manufacturing Corporation (Standard), for a ruling on whether the acquisition cost may be used as the basis in the computation of capital gains tax/withholding tax and documentary stamp tax on the proposed transfer of a "road lot" to its affiliate, Wellton Corporation (Wellton), a realty holding company, in view of the restrictions imposed by law on the alienability of the said road lot; and that the transfer of the said road lot is not subject to value-added tax. cdll It is represented that Standard is a domestic corporation with principal office address at Km. 17, South Superhighway, Paraaque, Metro Manila; that it is primarily engaged in the business of manufacture and/or assembly of electrical appliances for sale at wholesale; that Standard owns a parcel of land identified as Lot 12-A (Road) with an area of 1,779 square meters located at Barrio of La Huerte, Paraaque, Metro Manila and covered by TCT No. 9570 issued by the Registry of Deeds for Pasay City; that the subject road lot was previously part of a parcel of land known as Lot 12 containing an area of 15,984 square meters, then covered by TCT No. 10443 (S-57452) issued in the name of Standard; that on April 20, 1985, and in preparation for the transfer of the property in favor of Cambie Development Corporation, a real estate developer, the said parcel of land was subdivided thereby segregating a portion thereof known as Lot 12-B, with an area of 14,205 square meters, while the remaining portion with an area of 1,779 square meters, known as Lot 12-A., was delineated as a road lot; that on June 11, 1985 the subdivision plan was approved by the Land Registration Commission; that on June 26, 1985, Standard and Cambie Development Corporation entered into a Deed of Absolute Sale covering the segregated portion known as Lot 12-B; that consequently, the Register of Deeds cancelled TCT No. 10443 (S-57452) and issued TCT No. 95704 for Lot 12-B in the name of Cambie Development Corporation; that TCT No. 95705 was likewise issued for the road lot, known as Lot 12-A, in the name of Standard; that TCT No. 95705 pertaining to the subject road lot bears an annotation that "except by way of donation to the National Government, province or city and municipality, no portion of any road, passageway, street or open space shall be delineated or alienated, without any order of the court of the province, city or municipality where the property is located; that Standard now intends to transfer the said property in favor of an affiliate, Wellton, which owns the adjacent lots; that Wellton also intends to maintain the use of the said parcel of land as a road lot; and that in view of the restriction annotated on the title pursuant to Section 50 of Presidential Decree No. 1529, Standard filed on June 10, 1997 with the Regional Trial Court (RTC) of Paraaque, Branch 258, a petition for Authority to Transfer Property; that in an Order of the said RTC of Paraaque Branch 258 dated June 1, 1998, the dispositive portion of which states: "xxx xxx xxx "The Court finds the petition to be meritorious and therefore grants the same. "WHEREFORE, the petitioner is hereby authorized to transfer the parcel of land covered by Transfer Certificate of Title No. 95705 to WELTON CORPORATION which shall maintain the aforesaid property as road lot pursuant to Section 44 of PD 1529 otherwise known as the Property REGISTRATION DECREE. xxx xxx xxx" In reply, please be informed that pursuant to Section 50 of Presidential Decree No. 1529 which states: "SEC. 50. Subdivision and consolidation plans . Any owner subdividing a tract of registered land into lots which do not constitute a subdivision project as defined and provided for under P.D. 957, shall file with the Commissioner of Land Registration or with the Bureau of Lands a subdivision plan of such land on which all boundaries, streets, passageways and waterways, if any, shall be distinctly and accurately delineated. If a subdivision plan, be it simple or complex, duly approved by the Commissioner of Land Registration or the Bureau of Lands, together with the approved technical descriptions and the corresponding owner's duplicate certificate of title is presented for registration, the Register of Deeds, shall, without requiring further court approval of said plan, register the same in accordance with the provisions of the Land Registration Act, as amended: Provided, however, that the Register of Deeds shall annotate on the new certificate of title covering the street, passageway or open space, a memorandum to the effect that except by way of donation in favor of the national government, province, city or municipality, no portion of any street, passageway, waterway or open space so delineated on the plan shall be closed or otherwise disposed of by the registered owner without the approval of the Court of First Instance of the province or city in which the land is situated." In view of the restrictions imposed by law on the alienability of the said road lot and considering further that the said parcel of land is not a marketable piece of property, it would be highly improbable that individuals or corporations would be interested in acquiring the same. Its just that Wellton, being an affiliate of Standard, owns the adjacent lot that it became interested in the acquisition of the said road lot. RMO No. 41-91 provides that, the determination of the tax base of sales, exchange or any disposition or conveyance of real property for documentary stamp tax purposes shall be the same as the tax base used in the computation of the capital gains tax which means, gross selling price, fair market value, or zonal value of the real property, whichever is higher, except in the following instances , where actual consideration appearing in the Deed of Sale shall be an acceptable tax base in the computation of not only the capital gains tax but also of the documentary stamp tax , viz: 1.) Sale of residential lots financed by the National Home Mortgage Finance Corporation (NHMFC) under its Community Mortgage Project, in favor of poor tenant beneficiaries (BIR Ruling No. 001-91); 2.) Sale of land by the National Housing Authority (NHA) as mandated under E.O. 90, in favor of its target clientele/beneficiaries who belong to the lowest 30-50% of the income bracket. (BIR Ruling No. 232-90); 3.) Sale of real property effected through public bidding, e.g. judicial sale, extra-judicial foreclosure sale, where both the 5% capital gains tax and the documentary stamp tax where computed based on the highest or winning bid price (BIR Ruling Nos. 101-89;118-91) 4.) Negotiated purchase and/or sale of land by a government agency or government owned corporation (BIR Ruling Nos. 105-91; 001-91); and 5.) When the State or any of its instrumentalities in the exercise of its power of eminent domain, acquires through expropriation proceedings, private real property for public use upon payment of "just compensation" to the owner. Both capital gains tax and documentary stamp tax shall be computed on said "just compensation" as actual consideration. Similarly situated is BIR Ruling No. 144-96 dated December 24, 1996 addressed to Hon. Manuel "Lito" Lapid, which refers to the expropriation by the Provincial Government of Pampanga, with the assistance of the National Government of a number of properties which were adversely affected by the construction of FVR megadike and similar structures to prevent further destruction from lahar and floodwaters especially in the high risk areas in the province. This Office ruled that "Accordingly, expropriation sale is subject to the 5% capital gains tax regardless of whether any gain or profit was derived therefrom since the aforecited law is comprehensive enough to cover not only voluntary sale but also involuntary sale as in the instant case. However , both capital gains tax and documentary stamp tax shall be computed based on the actual consideration appearing in the Deed of Sale , pursuant to Revenue Memorandum Order No . 41-91 ." Corollary to the above-cited ruling and regulations, the subject road lot is also analogous to real properties covered by the rent control law under Presidential Decree No. 20, which the Supreme Court in the case of Reyes vs. Almanzor, ruled: "Nothing can justify or support their (referring to public respondent) view as it is of judicial notice that for properties covered by P.D. 20 especially during the time in question, there were hardly any willing buyers. As a general rule, there were no takers so that there can be no reasonable basis for the conclusion that these properties were comparable with other residential properties not burdened by P.D. 20. Neither can the given circumstances be nonchalantly dismissed by public respondents as imposed under distressed conditions clearly implying that the same were merely temporary in character. At this point in time, the falsity of such premises cannot be more convincingly demonstrated by the fact that the law has existed for around twenty (20) years with no end to it in sight. "Verily, taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. (Commissioner of Internal Revenue vs. Algue, Inc. et al., 158 SCRA 9 [1988]). Consequently, it stands to reason that petitioners who are burdened by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice should not now be penalized by the same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties." Such being the case, the non-use or non-application of the prescribed zonal valuation under special circumstance that adversely impacts the value or marketability of a property like in this case, a deviation from the general rule or guidelines on valuation of such property is always justified, otherwise, the imposition of an unjust or unreasonable tax or levy amounts to a confiscation of the property without due process and runs afoul of the equal protection clause of the Constitution. Hence, in this instant case, the use of assessed value or selling price (actual consideration), whichever is higher, in lieu of zonal value , is in order for being analogous to the exceptions recognized under RMO No 41-91, BIR Ruling No. 144.96 dated December 24, 1996 and Reyes vs. Almanzor, 196 SCRA 332, 328-329 (1991). After all, Standard has been paying real property tax on the basis of the assessed value of said road lot as per the tax declaration issued by the Office of the Municipal Assessor of Paraaque. Moreover, pursuant to Section 4.100-1 of Revenue Regulations No. 7-95 implementing then Section 100 (a) of the Tax Code, as amended by RA 7716 [now Section 106 (A) of the Tax Code of 1997], the sale of the real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to value-added tax. Accordingly, since Standard is not engaged in the real estate business and the subject property is virtually withdrawn from the commerce of man by virtues of the restriction annotated on the title thereof, the sale of Lot 12-A to Wellton, delineated as a Road Lot containing an area of 1,776 square meters, is not subject to the value-added tax. (BIR Ruling No. 054-96 dated May 14, 1996) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. LLpr Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue