Tax Consequence of a Deed of Absolute Sale which Allegedly is Actually a Deed of Exchange

August 3, 1987 BIR RULING NO. 228-87 35 (c) 250-82 228-87 M a d a m : This refers to your letter dated May 3, 1987 requesting a ruling on the tax consequence of a Deed of Absolute Sale which allegedly is actually a Deed of Exchange. It appears that on July 12, 1983 a Deed of Absolute Sale covering six (6) parcels of land was executed by Mr. Marcial Salvador in your favor; that the consideration of the sale is the assignment by you of all your rights and liabilities under BF Contract to Sell over a house and a lot identified as No. 85 M.R. Luna Street (Phase III), B.F. Homes, Paraaque, Metro Manila; that the total value of the property of Mr. Marcial Salvador is P79,180.00 as of January, 1985; and that your property which you transferred to Mr. Marcial Salvador is valued at P28,000.000 for the land and P79,000.00 for the house but which as of November 11, 1983 was burdened with unpaid amortizations of P75,095.25 in favor of Banco Filipino and P20,428.82 in favor of Cityland Corporation covering principal, interests and penalties for late payment. In reply thereto, I have the honor to inform you that in BIR Ruling No. 250-82 dated September 29, 1982, this Office ruled that under Section 140 of Revenue Regulations No. 2 otherwise known as the Income Tax Regulations, for income to be realized in exchanges of property, it is required that the property or interest in property received in exchange must be essentially different from the property or interest in property disposed of. This means that there must be a change in substance and not merely a change in form. Considering, that the parties to an exchange of real properties will not get something fundamentally and essentially different from what they already had prior to the exchange, the parties are not subject to income tax as a result of the said transaction. However, while the provision of Section 140 of Revenue Regulations No. 2 had been copied from the U.S. Income Tax Regulations, the corresponding statutory provision which it is supposed to implement does not exist in our present Tax Laws, in which case, the aforementioned ruling was abandoned by this Office in BIR Ruling No. 125-85 dated August 12, 1985 where this Office ruled that the net capital gains realized from the sale, exchange or other disposition of real property by a citizen of the Philippines or resident alien individuals shall be subject to final income tax at the rates prescribed by then Section 34(h) of the Tax Code, as amended by Batas Pambansa Blg. 37, and implemented by Revenue Regulations No. 8-79. Considering that the exchange transaction in this case took place on July 12, 1983 or prior to BIR Ruling No. 125-85 dated August 12, 1985, said BIR Ruling cannot be given retroactive application on the ground that the same will be prejudicial to the taxpayers. (Sec. 278 Tax Code, as amended) cdta In view thereof, this Office believes and so holds that the parties are not subject to income tax as a result of the aforementioned transaction. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner