Whether RMO No. 33-81 Applies on the Foreclosure of Mortgages Constituted in Favor of Citibank and Bank of America

December 10, 1985 BIR RULING NO. 217-85 34-h 118-83 217-85 Gentlemen : This refers to your letter dated October 28, 1985 stating that you are the retained counsel of Citibank, N.A. and Bank of America NT & SA both of which are foreign banking institutions incorporated under the laws of the United States of America and duly licensed to do business in the Philippines; that like all other commercial banks, the aforementioned banks have been extending loans and banking facilities secured by real estate mortgages; that with the expiration of the Laurel-Langley Agreement on July 3, 1974, your clients like other foreign banks licensed to do business in the Philippines were allowed to continue with their present practice of extending loans against real estate mortgages but may not bid at the extrajudicial foreclosure of the mortgaged real estate properties upon failure of the borrower-mortgagor to pay his/its obligations, at maturity; that the Central Bank of the Philippines, realizing the adverse effect on the banking industry arising out of the legal problem, allowed foreign banks to enter into irrevocable Trustor-Trustee arrangements with entities of their choice for the sole purpose of allowing the trustee to bid so that the foreign banks will be able to attain reasonable and honest level of bids during extrajudicial/judicial foreclosure sales of real estate mortgages; that if there are bidders and the bids presented during auction sales are reasonable, the trustee will not bid; that it is only when the bids are unconsciously low or when there are no bidders that the trustee places a bid; that your clients preferred that you act as their trustee for the purpose in favor of buyers qualified under the Constitution; that the "Integrated Credit and Collection Services Co." (ICCS), a partnership which you have set up has entered into Irrevocable Trust Agreements with your clients; that the trust agreements essentially provide that your clients irrevocably constitute and name ICCS as trustee to enable the latter to bid at the extrajudicial foreclosure of the mortgages held by the former; that if there are no other bidders at the foreclosure sale, ICCS submits a bid price usually corresponding to the unpaid obligations, inclusive of interest and other charges due on the loan of the borrower; that your clients extends ICCS a loan corresponding to the amount of the bid price ICCS submits and the proceeds of this loan is credited to the borrower's defaulted account; that the loan will then be liquidated upon redemption or sale of the property to purchasers duly qualified under the constitution, whichever comes first; that ICCS in preparation for the sale of the foreclosed real properties, tried to consolidate one such property in its name; but that when ICCS tried to transfer title in its name, the Revenue District Officer refused to issue a certification authorizing the transfer of title to ICCS, unless ICCS submits proof that the capital gains tax due from the original owner of the foreclosed property is paid. cdtech Based on the foregoing representation, you now request a ruling as to whether the provisions of Revenue Memorandum Order No. 33-81 will apply on the foreclosure of mortgages constituted in favor of your clients, the Citibank, N.A. and Bank of America NT & SA. In reply thereto, I have the honor to inform you that in case a bank acquires the real property mortgaged through foreclosure sales, it may avail of the procedure prescribed by Revenue Memorandum Order No. 33-81 by filing an application for the issuance of the certificate required by Section 34(h) of the Tax Code with the Revenue District Officer having jurisdiction over the place where the property sold or disposed of is located. If the property was acquired by the trustee of the bank, as in the instant case, the same procedure as provided under said Order should be followed and, consequently, the Revenue District Officer should issue the required certificate after an application for such purpose has been filed, containing all the information necessary for the imposition of the capital gains tax on the debtor-mortgagor. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner