BIR Ruling No. 161-84

September 26, 1984 BIR RULING NO. 161-84 43-b-196-83-161-84 Gentlemen : This refers to your letter dated August 27 and September 13, 1984 stating that Rizal Commercial Banking Corporation (RCBC) through its Trust and Investments Division and an individual taxpayer (hereinafter referred to as trustor) are contemplating to execute a trust agreement whereby the latter will establish a trust fund for the primary purpose of insuring his anonymity at the same time providing him with the necessary personality to acquire a 10-storey commercial building owned by Gasanco, Inc., a real estate corporation of which he is one of the principal owners; that once RCBC as trustee shall have acquired the building from Gasanco, Inc. under a trust account, the trustor intends to sell it to the Philippine American Life Insurance Company (Philamlife) which had earlier indicated to him in his personal capacity of its willingness to buy the building for P65M cash, on condition that payment thereof may only be made upon presentation of the covering Transfer Certificate of Title duly registered in its name; that the building is fully tenanted, covered by various lease contracts all of which shall later be assigned to Philamlife; that after buying the building, Philamlife shall continue the business of having it rented out; that upon execution of the trust agreement, the trustor shall deposit with RCBC the initial trust fund of P11,400,100.00; that as a trustee, RCBC shall thereafter make an offer to Gasanco, Inc. to buy the building on installment at a price of P64.5 Million under the following terms of payment, viz: down payment of approximately 17.6% of total price and the balance payable in 7 equal annual installments; that under the deed of trust, the trustee shall be vested with full authority to bind the trust fund with respect to any and all conditions as shall be imposed by Gasanco, Inc. including the power (1) to apply the entire initial trust fund for the payment of the agreed down payment; (2) to constitute a pledge or holdout on the entire trust fund as security for the payment of the unpaid purchase price; and (3) to pay out of the trust fund all subsequent installments as they fall due; and that RCBC has accepted the engagement as trustee to assure the full liquidation by Gasanco, Inc. of its loan obligation to RCBC secured by a mortgage on the building. You now request for a ruling on the tax consequence of the aforementioned transactions. In reply, please be informed that under Section 43 of the Tax Code as implemented by Sections 175 and 176 of the Income Tax Regulations, the sale of real property is on the installment plan if the initial payments in the year of the sale do not exceed 25% of the selling price ; otherwise, the sale is on the deferred-payment basis, not on the installment plan. Accordingly, since as represented, the initial payment to be made by the trust during the year of sale is only 17.6% of the selling price which is P64.5 Million, the seller Gasanco, Inc. may report the gain derived from the sale of the building used in its business on the installment basis. In other words, it should return as income in each of the taxable years over which the trust as purchaser will pay the purchase price, a proportion of the installment payments actually received during each of the such years, which the total profit realized or to be realized when the property sold is fully paid bears to the total contract price. Moreover, as real estate dealer, Gasanco, Inc. is subject to the ordinary corporate income tax rates prescribed by Section 24(a) in relation to Section 34(a)(1) both of the Tax Code as amended, on such gain. Finally, since the trust to be created in this case is revocable, any gain realized by it from the subsequent sale of the building to Philamlife, consisting of the difference between the selling price of P65M cash and the adjusted basis of the property which is P64.5 Million plus selling expenses, shall be taxable income to the trustor pursuant to Section 59 in relation to Section 21(b) both of the Tax Code, as amended. aisadc Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner