No Capital Gains Tax Where There is a Partition of the Estate and the Heirs Agreed to Receive the Cash Equivalent of Their Shares

December 3, 1991 BIR RULING NO. 258-91 21 (e) 000-00 258-91 S i r : This refers to your letter dated September 20, 1991 requesting in effect a ruling as to whether or not A and D in the following case is subject to capital gains tax: "The parents of seven heirs A, B, C, D, E, F and G died intestate in a sea mishap. The deceased left the following assets: "I. Rice land valued at P21,000.00 II. Residential Lot valued at 20,000.00 III. Cash-in-bank 11,937.00 Total Hereditary Estate P52,937.00 "The heirs agreed to set up a reserve fund in the amount of 3,937.00 for the estate (Inheritance) taxes, necrological services, documentation, legal fees and other expenses, thereby leaving a NET HEREDITARY ESTATE in the amount of P49,000.00 "The heirs then executed an extra-judicial settlement of estate, paid the proper estate tax, dividing the assets as follows: "I. The rice land valued at P21,000.00 was assigned to A who compensated B & C for P7,000.00 each as their shares in the inheritance thereby leaving the value of P7,000.00 as A's net share in the inheritance. "II. The residential lot valued at P20,000.00 was given to D who compensated E for P7,000.00 for her share and F for P6,000.00 as her partial share. "III. The remaining cash of P8,000.00 (after deducting the reserve fund of P3,937.00 above) was divided between F and G at P1,000.00 and 7,000.00 respectively thus completing F's share to P7,000.00" In reply, please be informed that under Section 21 (e) of the Tax Code, as amended, 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 individual, including estates and trusts, shall be taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. On the other hand, under Article 1082 of the Civil Code, every act which is intended to put an end to indivision among co-heirs and legatees and devises is deemed to be a partition, although it should purport to be a sale, an exchange, a compromise, or any other transaction. Moreover, under Article 1086 of the Civil Code, should a thing be indivisible, or would be much impaired by its being divided it may be adjudicated to one of the heirs, provided he shall pay the others the excess in cash. From the foregoing, it is clear therefore, that, in the instant case, A and D, are not subject to the 5% capital gains tax imposed under the aforecited provision of Section 21 (e) of the Tax Code, as amended, considering that there was neither a sale, exchange nor disposition of real property on their part, but a partition of the estate of their parents wherein both of them agreed to receive the cash equivalent of their respective shares in the estate of their parents. cdtech Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner (Officer-in-Charge)