Taxability of a Sale on a Deferred Payment Basis

September 16, 1992 BIR RULING NO. 263-92 21 (e) 422-88 263-92 Exclusive From The Islands, Inc. 587 Sierra Madre Street Mandaluyong, Metro Manila Attention: Ms . Corazon T . Alcantara VP-Finance and Administration Gentlemen : This refers to your letter dated June 3, 1992 requesting affect a ruling as to whether or not under the Contract To Sell executed by and between you and Ms. Gertrudes Vivo on March 4, 1992, the seller is obliged to pay the capital gains tax on the down payment already made amounting to P1,800,000.00. Documents submitted show that on March 4, 1992, you and Ms. Gertrudes Vivo executed a Contract To Sell relative to the sale of the parcel of land registered in the name of Ms. Gertrudes Vivo situated at Alabang, Muntinlupa covered by TCT No. (165344) 112288 for and in consideration of the sum of P9,007,500.00; and subject to the conditions, among others, that the Buyer shall pay the Seller a down payment of P3,300,000.00 payable in the following manner: "a) P443,613.37 to be paid directly to the Premiere Development Bank to obtain release of the mortgage of the property; "b) P300,000.00 which was paid in advance to the Seller last November 08, 1991; "c) n "d) P756,386.63 to be paid to the seller upon completion of the resurvey and clear the right of way from all liens and encumbrances which shall be undertaken by the seller to determine the actual area being sold to the Buyer; "e) P1,500,000.00 to be paid by the Buyer to the Seller within a period of twelve (12) months from the signing of the contract." In reply, please be informed that Section 42 (b) of the Tax Code, as amended provides. viz: "Sec. 42. Installment basis (a) xxx xxx xxx "(b) Sales of realty and casual sales of personalty In the case of (1) a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year) for a price exceeding one thousand pesos, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent of the selling price, the income may under regulations prescribed by the Secretary of Finance, be returned on the basis and in the manner above prescribed in this Section. As used in this Section the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made." Generally, income from the sale of real property may be reported either on the installment basis or on the deferred payment basis, not on the installment plan. The basic distinction between a sale of real property on the installment plan and sale on a deferred payment basis, not on the installment plan, lies on the amount of "initial payments" received by the seller. The sale is on the installment plan if the initial payments in the year of sale do not exceed twenty-five percent (25%) of the selling price. If the initial payments in the year of sale exceed twenty-five percent (25%) of the selling price, then the sale is on the deferred-payment basis, not on the installment plan (Sec. 175, Revenue Regulations No. 2). The term "initial payments" is defined to mean payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale or other disposition is made. This term must not be equated with what is commonly called "down payment" because its meaning is much broader than that. While it covers any down payment made; it goes further and includes all payments actually or constructively received during the year of sale. (Gertrude H. Sweet, 8 BTA 404; Cartland Specialty Co., 22 BTA 808) And the aggregate of all such payments determines whether or not the limit which the law has set has determines whether or not the limit which the law has set has been exceeded. (See BIR Ruling No. 70-034 dated June 29, 1970). Accordingly, since in the instant case it appears that in all probability the "initial payments" in the year of sale would exceed twenty-five percent (25%) of the selling price, the gains realized from the said sale should therefore, be reported on a deferred payment method, not on the installment plan. In other words, in a sale on a deferred payment basis, not on the installment plan, "the obligations of the purchaser received by the vendor are to be considered as the equivalent of "cash" (Sec. 177, Rev. Regulations No. 2). Accordingly, the seller in the instant case, is subject to the 5% capital gains tax not merely on the amount paid amounting to P1,800,000.00 but on the whole contract price of P9,007,500.00. LLjur Very truly yours, JOSE U. ONG Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official copy.