Tax Treatment of Sale of Property to a Non-Stock, Non-Profit Association of Squatter-Residents Under the CMP

August 27, 1992 BIR RULING NO. 234-92 21 (e) 24 000-00 234-92 Star Special Watchman & Detective Agency, Inc. Mezzanine Floor, Castro Building 58 South Avenue corner Tomas Morato Quezon City Attention: Ms . Maria Fe Fernandez-Newmann Attorney-in-Fact Gentlemen : This refers to your letter dated May 21, 1992, in effect, requesting confirmation of your opinion that pursuant to Section 20 of R.A. No. 7279 approved March 24, 1992 and published in the March 28, 1992 issue of the Philippine Times Journal and Malaya , your Agency, Messrs. Celso A. Fernandez and Manuel V. Fernandez as landowners are exempt from capital gains tax, or any project related income taxes, and consequently from the expanded withholding tax upon your sale of property located in Barangay San Miguel, Puerto Princesa City to the Katipunan Tenants Association, Inc. (KTA), a non-stock, non-profit association of squatter-residents in accordance with the Community Mortgage Program (CMP) initiated by the National Housing Authority. It appears that pursuant to the Community Mortgage Program, urban squatters are given the chance to acquire the lots they have occupied and this is effected by first organizing the squatter-residents into an association; that through a Letter-Guaranty by a Government financing institution the National Home Mortgage Finance Corporation (NHMFC) the landowner executes a Deed of Sale to the Association which stands as the borrower and debtor to the extent of the total amount paid by NHMFC to the landowner; that in the instant case, the property being sold to the Association is owned by Star Special Watchman and Detective Agency, Inc., jointly with the individual owners Celso A. Fernandez and Manuel Fernandez who are themselves the controlling owners of said corporation, that since said parcel of land is not used in business by the corporation or by any of the individual owners who are all residents of Metro Manila, said property which is a portion of the undivided parcel of land covered by TCT No. T-13679 is a capital asset (held for investment); that said property is fully occupied by squatters who never bothered to pay rent to the landowners not only because the latter seldom visit Puerto Princesa but because they did not designate any agent nor intended to collect rental from the squatters. cdta In reply, please be informed that pursuant to Section 20 of R.A. No. 7279, pertinent portion of which reads: "Sec. 20. Incentives for Private Sector Participating in Socialized Housing . To encourage greater private sector participation in socialized housing and further reduce the cost of housing units for the benefit of the underprivileged and homeless, the following incentives shall be extended to the private sector: xxx xxx xxx (d) Exemption from the payment of the following: (1) Project-related income taxes; (2) capital gains tax on raw lands used for the project; xxx xxx xxx the landowners who sell their property to the Tenant's association pursuant to the Community Mortgage Program are exempt not only from capital gains tax but also on Project-related income tax on ordinary gain, and from the expanded withholding tax under Revenue Regulations No. 1-90. Although the land is owned in co-ownership by a corporation and two individuals who happen to be also principal stockholders of the corporation, since the land is not used in business by either of the owners but also is being held as an investment by all the co-owners, the land is considered a capital asset. Upon the sale thereof, the capital gains realized by the owners shall be exempt from capital gains tax pursuant to the aforequoted provision of R.A. 7279, otherwise known as the Urban Development and Housing Act of 1992. llcd Very truly yours, JOSE U. ONG Commissioner of Internal Revenue