Basis in Determining Capital Gains Tax Liability

September 13, 1990 BIR RULING NO. 175-90 21 (e) 044-84 175-90 M a d a m : This refers to your letter dated August 30, 1990 inquiring if the compulsory sale of your property located at Tandang Sora Avenue, Quezon City, to the government due to its street widening program is subject to capital gains tax; in the negative, you would like to request a certificate of exemption from the payment of said tax, and in the affirmative, you would like to request a tax concession that the actual consideration of the sale be made the basis of the same instead of the zonal value of your said property. It is represented that you were told that payment on the aforesaid sale will only be made upon settlement of the corresponding capital gains tax which is based on the present valuation of this Office which is way above the consideration you will be receiving. 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 forms 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 expropriation by the government through the Department of Public Works and Highways, of your aforementioned property is therefore, subject to the 5% capital gains tax imposed under Section 21(e) of the Tax Code, as amended. However, your tax liability from the said sale shall be determined either under Section 21(a) or (e) of the Tax Code, at your option. In case you elect the former, this Office shall issue the certification authorizing the transfer of title to the purchaser. (Sec. 7 (a)(5), Revenue Regulations No. 8-79) On the other hand, in case you 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 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 expropriated property can be effected, you shall file the corresponding capital gains tax return within thirty (30) days from said submission of the certificate of title. The Department of Public Works and Highways shall within the same period, withhold the capital gains tax due from you and remit the same to this 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, as in this case, stipulates that the seller shall not be paid until title to the property is transferred to the government. Moreover, this Office, realizing that it takes a considerable amount of sacrifice and fortitude on your part to part with and dispose of your real property, 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 the Department of Public Works and Highways, is the purchaser of your said real property, the use of the actual consideration of P26,700.00 as basis in determining your capital gains tax liability as a consequence of the said sale of your property, is hereby granted as an exception to the policy of this Bureau, in relation to Section 21(e) of the Tax Code. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner