Exemption from the Payment of the Capital Gains Tax

May 10, 1988 BIR RULING NO. 202-88 21 (e) 000-00 202-88 Gentlemen : This refers to your letter dated November 5, 1987 stating that on April 2, 1982, the spouses Arsenio Cid and Virginia Cid executed a real estate mortgage in favor of your client, 5 Sisters Realty & Development Corporation to secure the payment of a loan of P600,000; that the mortgagors failed to pay said obligation including interests on its due date; that as a consequence thereof, your client foreclosed the said mortgage extrajudicially; that at the public auction sale held on October 28, 1987, your client was the highest bidder; that the bid price of P1,193,639.00 was credited as full satisfaction of the aforesaid loan; and that the Office of the Clerk of Court of Makati, Regional Trial Court issued the Certificate of Sale to your client on October 28, 1987. cdt Based on the foregoing representations, you now request opinion as to whether your client is exempt from the payment of the capital gains tax. In reply, I have the honor to inform you that under Section 21(e) of the Tax Code, as amended by Executive Order No. 37, the mortgagors, i.e., the spouses Arsenio Cid and Virginia Cid, and not your client, are the parties liable for the payment of the capital gains tax imposed therein. The capital gains tax consists of 5% based on the selling price or market value thereof, whichever is higher; and that the tax applies not only to ordinary sale transaction but also to pacto de retro sales and other forms of conditional sales. This accordingly includes mortgage foreclosure sale. In other words, in the instant case, the 5% capital gains tax which is payable by the debtor-mortgagor, is based on the gross selling price as shown in the mortgage foreclosure sale in the amount of P1,193,659.00 or the fair market value of the property, whichever is higher. (Par. 2 and 3.6, RMO No. 29-86). BIR clearance is required before said property is transferred to your client, pursuant to Section 50(a)(4) of the Tax Code, as amended by Executive Order No. 37 reading as follows: "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 tax herein imposed, if any, has been paid." (BIR Ruling No. 010-87 dated January 14, 1987) Moreover, the Sheriff's Deed of Sale is subject to documentary stamp tax based on the consideration or value received or paid for the land as stated on said Deed pursuant to Section 209 of the Tax Code, as amended. (BIR Ruling No. 313-87). Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner