Determination of Capital Gains Tax Liability on Purchase of Lots by the DOTC

September 4, 1991 BIR RULING NO. 171-91 11 (e) 175-90 171-91 Gentlemen : This refers to your letter dated April 10, 1991 stating that in the implementation of the National Telephone Program, you are currently purchasing lots wherein (DOTC) telephone exchanges will be constructed; that lot owners selling the said lots in your favor are required to pay the capital gains tax within 24 hours; that such payment is a condition precedent to the transfer of the title of ownership; that inasmuch as, under Commission On Audit (COA) regulations, you could not process the payment of the lot without the Transfer Certificate of Title having been first issued to the DOTC, you then requested this Office to direct the Revenue District Office concerned to process the papers pending the payment of the tax; that under this payment scheme, you will issue check payable to this Office corresponding to the tax payable, thereby ensuring collection; that with this arrangement, you will be both able to comply with COA rules and to pay the lot owners; and that you are now midway in the implementation of the aforementioned project. cdt Based on the foregoing representations, you now request in effect a ruling directing Revenue District Offices affected by your National Telephone Program to process papers pending before said Offices concerning the aforesaid sale in your favor of lots where telephone exchanges will be constructed even prior to the payment of the taxes that may be due as consequence of the said sale. In reply, please be informed that under Section 21 (e) of the Tax Code, as amended, capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets, including pacto de retro sales and other form of conditional sales, by individuals, including estates and trusts, shall be taxed at the rate of 5% based on the gross selling price or the fair market value, prevailing at the time of sale, whichever is higher. Provided, that the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 21 (a) or (e) of the same Code, at the option of the taxpayer. Such being the case, the lots you bought in implementing the National Telephone Program classified as capital asset, from individual lot owners are therefore subject to the 5% capital gains tax imposed under the above cited Section of the Tax Code. However, the tax liability of said lot owners from such sale in favor of the government through the DOTC shall be determined either under Section 21 (a) or (e) of the Tax Code, at their option. In case they elect the former, this Office shall issue the certificate authorizing the transfer of title to the purchaser. (Section 7 (a) (5), Revenue Regulations No. 8-79). On the other hand, in case they elect the latter, this Office hereby allows the registration of the Deed of Sale with the Register of Deeds concerned and consequently, the transfer of title to the property in favor of the government. Thereafter, upon submission of a new certificate of title in the name of the government, at which time payment of the property can be effected, the said individual lot owners shall file the corresponding capital gains tax return within thirty (30) days from said submission of the certificate of title. The DOTC thru your Office shall within the same period, in turn, withhold the capital gains tax due from the said lot owners and remit the same to the Bureau. (BIR Ruling No. 044-84) In this connection, it may be noted that this ruling applies only to sales of property in favor of the government wherein the contract stipulates that the sellers shall not be paid until title to the property is transferred to the government, or as in the instant case, such transfer of title in favor of the government as a condition required by government regulations before payment could be processed and effected to the seller. However, this Office, realizing that it takes a considerable amount of sacrifice and fortitude on the part of said individual lot owners to part with and dispose of their properties, especially at a price much lower than the current zonal valuation or market appraised value, and considering that the likelihood of understatement of consideration is remote in this case as the government, through your Office under the Department of Transportation and Communications is the purchaser of the said lots where telephone exchanges will be constructed, the use of the actual consideration as basis in determining the capital gains tax liability of the aforesaid individual lot owners on said sale in your favor of their respective property is hereby allowed as an exception to the policy of this Bureau, in relation to Section 21 (e) of the Tax Code. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge