Award of Lot Sold in Settlement of Swindled Money Subject to Capital Gains Tax

May 7, 1993 BIR RULING NO. 200-93 AWARD OF LOT SOLD IN SETTLEMENT OF SWINDLED MONEY SUBJECT TO CAPITAL GAINS TAX 21 (e) 91-89 200-93 Ms. Muniera Santos Ala Moana Hotel, 410 Atkinson Drive Honolulu, Hawaii This refers to your undated letter filed with this Office on March 1, 1993, stating in effect, that you were swindled in the amount of 9.7 million pesos; that you filed a case against a certain Cesar T. Gragera as the swindler thereof which the court decided in your favor; that you were able to garnish lots totalling 4300 square meters which amounted to about 4 million pesos; and that since the said lots were awarded in your favor as payment on the case you filed against the aforenamed swindler, you are of the opinion that the same is exempt from the payment of the capital gains tax since there was no direct transaction between you and the lot owner and also because there was no gain, but instead a loss, or that you received less than the amount that you have really lost in the swindling committed against you. cdtech Based on the foregoing representations and document submitted, you are now requesting, in effect, a ruling exempting the award the court made in your favor of said lots amounting to 4 million pesos from the payment of the capital gains tax on the grounds as aforementioned. In reply, please be informed that Section 21(e) of the Tax Code, as amended, provides viz: "Sec. 21. (a) . . . (b) . . . (c) . . . (d) . . . "(e) Capital gains from sales of real property . The provisions of Section 33(b) notwithstanding, 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 (zonal value) prevailing at the time of sale, whichever is higher. . . ." (Emphasis supplied) From the abovequoted provision of Section 21(e) of the Tax Code, as amended, it is clear that the award by the court in your favor of the realty of Atty. Gragera, amounting to 4 million pesos as a result of the case you filed against him on the swindling, he, as per court's findings, committed against you amounting to 9.7 million shall render Atty. Gragera liable to the 5% capital gains tax imposed under the aforequoted provision of Section 21(e) of the Tax Code, regardless of whether a gain was in fact realized by you or Atty. Gragera from such disposition of his realty and whether or not there was in fact a direct transaction between the two of you for the transfer of said realty in your favor, considering that Section 21(e) of the Tax Code does not distinguish nor qualify as to whether the sale, exchange or other disposition of realty was made voluntarily or involuntarily by the owner thereof, as in the instant case, and whether or not gain was in fact realized therefrom in order for the disposition of an individual of his realty located in the Philippines, classified as capital asset, to be subject to the 5% capital gains tax based on the gross selling price thereof or its fair market value which, as consistently ruled by this Office, refers to the zonal valuation of realty established by this Office for tax purposes. Moreover, the law itself has already presumed that gain has been realized by an owner of realty from its sale, exchange, or other disposition. Such being the case, this Office is of the opinion, as it hereby holds, that the award by the court in your favor of the aforesaid realty of Atty. Gragera, amounting to 4 million pesos, is subject to the 5% capital gains tax imposed under Section 21(e) of the Tax Code. Accordingly, as owner of said realty, Atty. Gragera is liable to the 5% capital gains tax based on the bid price of P6,500,000.00 which amount was credited to the partial satisfaction of the writ of execution. Moreover, your attention is invited to Section 49(a) (4) of the Tax Code which provides that, no registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner of Internal Revenue, or his duly authorized representative, has certified that such transfer has been reported and the corresponding tax imposed under the Tax Code, if any, has been paid. aisadc VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue