BIR Ruling No. 299-14

July 24, 2014 BIR RULING NO. 299-14 Sections 24 (D) (1), 188 & 196 of the Tax Code of 1997, as amended Paltongan Almazan Pondemira & Solis-Garcia Law Offices Ground Floor, One World Square Building No. 2 Upper Mckinley Road Mckinley Town Center, Fort Bonifacio Taguig City Attention: Katrina B. Pondemira Gentlemen : This refers to your letter dated September 7, 2012, requesting tax ruling in behalf of Suntrust Properties, Inc.,regarding the tax implication of a transfer with deed of exchange, executed by buyers of properties whose titles were mixed up, for purposes of correcting the names in their transfer certificates of title (TCT). Documents submitted disclosed that sometime in 2003, Norma L. Duran purchased a parcel of residential house and lot to Suntrust Properties, Inc. (SPI),designated as Lot 37, Block 6 in Regal Homes, Alapan 1-A, Imus, Cavite with a lot area of sixty square meters (60 sq.m.) now covered by TCT No. T-1054323, under the name of Norma L. Duran. On the other hand, Spouses Laurence and Lani Atega purchased the Lot 34 Block 6 now covered TCT No. T-814160 registered in the name of Spouses Laurence and Lani Atega. However, it was found out later that Spouses Laurence and Lani Atega first moved-in into the subdivision and occupied Lot 37 instead of Lot 34 situated on the land owned by Norma L. Duran covered by TCT No. T-1054323. Subsequently, Norma L. Duran moved-in and occupied Lot 34 instead of Lot 37 situated on the land owned by Spouses Laurence and Lani Atega covered by TCT No. T-814160. aIcDCH Due to the mix-up, on February 17, 2011, Norma L. Duran filed a "Complaint for Specific Performance with Damages" against SPI and Spouses Laurence and Lani Atega before the Regional Trial Court (RTC) of Mandaluyong, Branch 211, Mandaluyong with Civil Case No. MC11-5256 entitled "Norma L. Duran vs. Suntrust Properties, Inc. and Spouses Laurence Atega and Lani R. Atega." On August 28, 2012, RTC of Mandaluyong City, Branch 211 rendered its decision approving in toto ,the Compromise Agreement dated August 9, 2011 entered into by and between Norma L. Duran, SPI and Spouses Laurence Atega and Lani R. Atega; that said Decision has become final and executory on July 12, 2013; and that said Compromise Agreement provides that: "Obligations of Suntrust Properties, Inc.: 1. To pay the plaintiff the sum of Three Thousand Five Hundred Pesos (P3,500.00) on or before August 19, 2011. Payment will be deposited in her account at BDO with savings Account No. 550137769 2. Execute and deliver a Deed of Exchange in connection with the property subject matter of this case and pay all expenses for the fees and taxes required for the necessary rectification of the titles. 3. Exert best effort to assist Plaintiff to sell subject property. 4. Dismiss counterclaim. IaECcH Obligations of Sps. Laurence Atega and Lani Atega: 1. To execute and deliver Deed of Exchange. 2. To release and discharge Plaintiff and Suntrust Properties, Inc.,from any claim, obligation and/or causes of action. Obligations of Plaintiff Norma L. Duran: 1. Dismiss complaints against Suntrust Properties, Inc. and Sps. Laurence Atega and Lani Atega. 2. Execute waiver/quit claims against Suntrust Properties, Inc. and Sps. Laurence Atega and Lani Atega." To give effect to the approved compromise agreement, Norma L. Duran and Sps. Laurence Atega and Lani Atega, executed a Deed of Exchange of Real Property Agreement dated June 17, 2011 and September 10, 2012, wherein the parties agreed to exchange their respective properties. In reply, we regret to inform you that your request for tax exemption cannot be granted for lack of legal basis. Section 24 (D) of the Tax Code of 1997, as amended, provides, viz. : "Section 24 (D) Capital Gains from Sale of Real Property. (1) In General. The provisions of Section 39 (B) notwithstanding, a final tax of 6% based on the gross selling price or current market value as determined in accordance with Section 6 (E) of this Code, whichever is higher, is hereby imposed upon the capital gains presumed to have been realized from the sale, exchange and other dispositions of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: ..." CcaASE Although the conveyance of the real properties is in pursuance of a court order, the transfer of the said properties in favor of the Plaintiff is covered by the clause "other dispositions of real property" under Section 24 (D) of the Tax Code of 1997, as amended, and therefore subject to the capital gains tax imposed therein. It is noted that the properties were correctly titled in the names of the owners and the decision of the Court was not a determination of a true owner of the real properties. Thus the exchange is not to return the property to the lawful owner but a mutual concession of the parties who intend to make an exchange with a view to conclude civil action filed. The conveyance being a disposition of real property under Section 24 (D) of the Tax Code, as amended, is likewise subject to the documentary stamp taxes imposed in Section 188 and Section 196 of the Tax Code, as amended. (BIR Ruling No. 360-11 dated September 30, 2011) Such being the case, both exchanging parties i.e., Norma L. Duran and Sps. Laurence Atega and Lani Atega are subject, separately and distinctly, to the 6% capital gains tax based on the fair market value or zonal value of the properties, whichever is higher, as imposed under Section 24 (D) (1) of the Tax Code of 1997, as amended, however, it can be gleaned from the approved compromise, SPI shall shoulder the taxes required for exchange to the titles. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. TAHcCI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue