Whether a "Right to Redeem" Real Property is Within the Contemplation of "Land, Tenement or Other Realty"

November 25, 1998 BIR RULING NO. 169-98 201, 173-000-00-169-98 Padilla Law Office 7/F Padilla-De los Reyes Bldg. Juan Luna Street Binondo, Manila Attention: Atty . Eduardo P . Lizares Gentlemen : This refers to your letter dated May 19, 1998 requesting on behalf of your client, Santiago Land Development Corporation (SLDC), for a ruling on the following: "a) Are the deeds of assignment of property required to be included in the estate of Norberto Quisumbing (who at the time of his death was a resident of No. 5 Kaliraya Street, Quezon City, and who died sometime between April 25, 1988 and August 1989) upon which estate taxes are required to be paid? "b) If the answer to the previous query is in the affirmative, what is the correct amount of estate tax to be paid, including penalties and surcharges, if applicable, if the same has not yet been paid? "c) Were the documentary stamp taxes required to be paid at the time that the various lot owners assigned their right to redeem the lots subject matter of the Action? "d) If the answer to the previous query is in the affirmative, what is the correct amount of documentary stamp taxes to be paid, including penalties and surcharges, if applicable, if the same has not yet been paid?" It is represented that there is a pending case before the Regional Trial Court of Makati City, Branch 62, docketed as Civil Case No. 10513 wherein the late Atty. Norberto Quisumbing ("Atty. Quisumbing"), now substituted by his heirs, sought to compel the Philippine National Bank ("PNB") to allow him to exercise his right to redeem the lots foreclosed by the latter; that Quisumbing's right to redeem the foreclosed property was acquired by him from PNB's various debtor-mortgagors who mortgaged the lots to secure the defaulted obligations; that those debtors had assigned for valuable consideration to the plaintiff, the late Atty. Quisumbing, their respective rights to redeem their foreclosed lots; that among the defenses raised by PNB are: "a) the redemption was invalid because Quisumbing did not tender payment; "b) Quisumbing did not offer to pay all indebtedness of the debtor to PNB which under the PNB statute is a prerequisite to a valid redemption; and "c) the assignment to Quisumbing was invalid." that Atty. Quisumbing submitted in evidence the deeds of assignment of the foreclosed lots to establish his rights or capacity to institute the suit against PNB; that SLDC which acquired one of the lots foreclosed by PNB, was allowed by the trial court to be partially substituted for PNB with respect to the lot it purchased pendente lite form the latter, that among the documents submitted to this Office is the Deed of Assignment of Right of Redemption which covered the property acquired by SLDC from PNB, wherein the debtor-mortgagor assigned sometime in April 1985 to Quisumbing its right to redeem for 5% of the bid price which was P27,504,000.00 or P1,375,200.00; that the requisite documentary stamp taxes on the aforesaid deed of assignment including that on the other deeds of assignment of the right to redeem executed by the various debtor-mortgagors as represented by Ricardo C. Silverio have not been properly paid; that the bases of plaintiffs' right to redeem the subject properties are the deeds of assignment which the trial court had initially admitted as evidence; and that the defendants objected to its admissibility for lack of the required documentary stamp. pred In reply, please be informed of the following, viz: 1) Pursuant to then Section 78(a) of the Tax Code, as amended (now Section 85(A) of the Tax Code of 1997), 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 , wherever situated . . . to the extent of the interest therein of the decedent at the time of his death . Based on the above provision which is the estate law prevailing at the time of death of the decedent, the right to redeem by the various lot owners, which was assigned in favor of Atty. Quisumbing, and which is the subject of the various deeds of assignment in question is property duly includible in determining the value of the gross estate of the decedent. The deeds of assignment are property that form part of the "gross estate" of a decedent since they are "property, real or personal, tangible or intangible". The deeds of assignment show that they were acquired by Atty. Norberto Quisumbing (who according to you died sometime in 1988 or 1989) for a considerable price. The value indicated in the deeds of assignment are conclusive on the value of these properties in the determination of his "gross estate" to determine the applicable estate tax on his estate. cdlex 2) Then Section 77 of the same Tax Code (now Section 84 of the Tax Code of 1997) provides as follows, viz: "SEC. 77. Rates of estate tax . There shall be levied, assessed, collected, and paid upon the transfer of the net estate as determined in accordance with Sections 78 and 79 of every decedent, whether resident or non-resident of the Philippines, a tax based on the value of such net estate, as computed in accordance with the following schedule: "If the net estate is: Over But Not Over The tax Shall Be Plus Of Excess Over P200,000 Exempt - - P200,000 500,000 5% - P200,000 500,000 2,000,000 P15,000 8% 500,000 2,000,000 5,000,000 135,000 12% 2,000,000 5,000,000 10,000,000 495,000 21% 5,000,000 10,000,000 And over 1,545,000 35% 10,000,000 (As amended by Republic Act No. 7499.) The failure to pay the estate tax required to be paid under then Section 84 of the Tax Code, as amended is subject to the following civil penalties "SEC. 248. Civil penalties . (a) There shall be imposed, in addition to the tax required to be paid, penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases, among others , viz : "(1) Failure to file any return required under the provisions of this Code or regulations on the date prescribed; or "(2) . . . "(3) Failure to pay the tax within the time prescribed for its payment; or "(4) . . . "(b) In case of willful neglect to file the return within the period prescribed by this Code or regulations, or in case a false or fraudulent return is willfully made , the penalty to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case any permanent has been made on the basis of such return before the discovery of the falsity or fraud." "(c) The penalties imposed hereunder shall form part of the tax and the entire amount shall be subject to the interest prescribed in Section 249." The foregoing provisions shall apply only if the executor, administrator or the heirs will be filing the estate tax return for the first time. However, if there had been a return previously filed but the deeds of assignment were not in fact included or were not declared in the said estate tax return of the deceased, the penalty provided for in paragraph (b) of then Section 248 of the Tax Code, as amended, shall apply. cdll In addition to the above, then Section 249 of the same Tax Code provides that "there shall also be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by regulations, from the date prescribed for payment until the amount is fully paid". 3) On the question of whether a documentary stamp tax are due on the deeds of assignment and whether it is required to be paid at the time of the assignment, please be informed that Sec. 196 of the Tax Code of 1997 provides that: "SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property . On all conveyances, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land , tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher: Provided, That when one of the contracting parties is the Government, the tax herein imposed shall be based on the actual consideration. xxx xxx xxx The principal issue to be resolved, therefore is whether or not a "right to redeem" real property is within the contemplation of " land , tenement or other realty " of the above provision of the Tax Code so as to subject its sale or transfer for valuable consideration to documentary stamp tax. Under Art. 415(10) of the Civil Code, "real rights over immovable property" are themselves immovable or real property or realty. Even the plaintiffs themselves in their opposition in Civil Case No. 10513 (attached to your request for opinion) admitted that the right to redeem is " a real right over land ". In fact, the terms "land" or "other realty" as used in the context of documentary stamp taxes are understood as including any "interest or estate in lands" (Jones v. Magruder, 42 F. Supp. 193). The term "tenement" is also broadly construed to include "not only land, but rents, commons, and several other rights and interest issuing out of or concerning lands" (Word & Phrases, Vol. 41, page 341). If the terms "lands" and "tenements" are broadly understood in their common usage, there is no reason not to similarly treat the term "other realty", so that the term "other realty" should also be susceptible of a broad interpretation. Based on the foregoing, a right to redeem is therefore within the contemplation of the term "land, tenement and other realty" under Sec. 196 of the Tax Code. In BIR Ruling No. 530-88 and other similar rulings, this Office made a distinction between a deed of assignment of the right to redeem and a deed of redemption. A deed of redemption is distinct from an assignment for valuable consideration of the right to redeem. No redemption is being made when a right to redeem is being assigned for value. Furthermore, the said rulings are based on the premise that under Sec. 196 " the transaction which is subject to the documentary stamp tax is the conveyance of the real property to the purchaser . This is not so in redemption which involves restoration of the property to the mortgagor-debtor from the purchaser". Since a deed of assignment of the right to redeem is a conveyance of real property , such transaction is subject to the documentary stamp taxes, under Sec. 196 following the principle laid down in the above-cited BIR ruling. Furthermore, then Section 173 of the Tax Code, as amended (also Sec. 173 of the Tax Code of 1997), provides that documentary stamp taxes "shall be levied, collected and for . . . at the same time such act is done or transaction had . . . This means that the documentary stamp taxes due under Sec. 196 on the various deeds of assignment of the properties involved in Civil Case No. 10513 were due at the time the different deeds of assignment were executed. It appears from the deeds of assignment that these were executed in April and May of 1985. 4) As to what is the correct amount of documentary stamp taxes to be paid , including penalties and surcharges applicable . Based on the documents you attached to your request for opinion consisting of the deeds of assignment of the right to redeem the various properties involved in Civil Case No. 10513, covered by three separate deeds of assignment, over which the plaintiffs seek to be allowed to exercise their right to redeem, the documentary stamp taxes due on the sale or assignment of the right to redeem the said properties should be computed based upon the price for the sale or assignment of the right to redeem which is indicated in the attachments to be five (5%) percent of the purchase prices stated in each sheriff's certificate of sale. If the documentary stamp taxes under now Sec. 196 (then Sec. 209 of the Code of 1997, as amended by P.D. Nos. 147 & 1959) have not been paid upon the execution of the aforesaid deeds of assignment in favor of Atty. Norberto Quisumbing, the tax due is also subject to the 25% penalty imposed in Sec. 248(d) of the Tax Code of 1997, as amended, which shall be in lieu of the interest prescribed in Sec. 249 of the Tax Code from the date the tax is due until payment is made. Provided, however, that when there is a notice or demand to pay and the same is not paid within the time prescribed, there shall be collected on the total unpaid amount, including the surcharge, the interest prescribed in Sec. 249(a) from due date prescribed in the notice and demand until the amount is fully paid, which interest shall form part of the tax. In respect to your query whether the said document can be admitted or used in evidence, Section 210 of the Tax Code clearly provides that the deeds of assignment cannot be admitted or used in evidence by the court unless the correct amounts of the documentary stamp taxes under Sec. 196, including penalties and interest due thereon, shall have first been paid. This is true whether or not any objection to the admission of the documents was made since the parties to a case or the court are not at liberty to disregard a clear, mandatory and self- executing provision of the Tax Code. Moreover, Sec. 201 of the Tax Code provides as follows: "SEC. 201. Effect of Failure to Stamp Taxable Document . An instrument, document or paper which is required by law to be stamped and which has been assigned, issued and accepted or transferred without being duly stamped, shall not be recorded, nor shall it or any copy thereof or any record or transfer of the same be admitted or used in evidence in any court until the requisite stamp or stamps shall have been affixed thereto and cancelled. xxx xxx xxx The plaintiffs in Civil Case No. 10513 may, however, still pay the correct amount of taxes due to avoid the application of above section. After payment of the correct amount of taxes as indicated above the trial court may then admit and consider the deeds of assignment in deciding the case. LexLib 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. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue