5% Capital Gains Tax Exemption on the Deed of Reconveyance Executed by the Clerk of Court

July 19, 1988 BIR RULING NO. 339-88 21 (a) 227-88 339-88 Gentlemen : This refers to your letter dated June 23, 1988 requesting in effect a ruling as to whether or not a Deed of Reconveyance executed by the Clerk of Court in favor of the plaintiffs in a case pursuant to an order of the Court declaring the plaintiffs as the true and lawful owner of a certain parcel of land is subject to capital gains tax. cdt It is represented that Civil Case No. LP-8375-P entitled "Spouses Celedonio dela Cruz and Teodora dela Cruz vs. Pablo Velasquez" of the Court of First Instance of Rizal, Branch XXVIII, Pasay City is a complaint for the annulment of a deed of sale of a parcel of land situated in Talon, Las Pias, Metro Manila on ground of fraud and for the reconveyance of the said land to the plaintiffs; that the facts as found by the Court are as follows: that sometimes in 1970, defendant Pablo Velasquez made the plaintiffs Spouses Celedonio de la Cruz and Teodora de la Cruz who are illiterate, sign a document allegedly an authority for the defendant to work for the titling of the said land in the name of Plaintiffs; that eventually, plaintiffs were informed that what they signed was actually a deed of sale of their land with an area of 13,706 square meters more or less; that on the basis of said deed of sale, defendant was able to have the land in question titled in his name under Free Patent No. IV-1001153 of the Register of Deeds of Rizal; that as a consequence, plaintiffs filed the aforesaid complaint for the annulment of the deed of sale and reconveyance of the land to them; that on December 14, 1981, the court rendered a decision declaring as null and void the aforesaid deed of absolute sale and the plaintiffs as the true and lawful owners of the property covered by Original Certificate of Title No. FP-12 (Free Patent No. IV-1-001153) of the Register of Deeds of Rizal and ordered the defendant to reconvey the same to the plaintiffs who in turn were ordered to pay the defendant the sum of P10,000 representing the consideration for his working for the issuance of the Title; that the defendant appealed the said decision to the Court of Appeals wherein the decision rendered by the lower Court was affirmed; that the defendant elevated the case to the Supreme Court by a petition for certiorari, which was denied and the case remanded to the lower Court for execution of judgment; that on the basis of a motion for execution of judgment, the court ordered the defendant to reconvey the land to the plaintiffs; that because of the defendant's refusal to reconvey the land to the plaintiffs, the clerk of court upon order of the court executed a Deed of Reconveyance in favor of the plaintiffs. 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 individuals, 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. Accordingly, the Deed of Reconveyance executed by the Clerk of Court in favor of spouses Celedonio dela Cruz and Teodora dela Cruz involving the aforementioned property and registered in the name of Mr. Pablo Velasquez is not subject to the 5% capital gains tax imposed under said Section 21(e) of the Tax Code, as amended, since the same was executed pursuant to an order of the court declaring as null and void the deed of absolute sale in favor of Mr. Pablo Velasquez; and declaring further that the spouse Celedonio dela Cruz and Teodora dela Cruz are the true and lawful owners of the said land. In other words, there was no sale, exchange or other disposition of real property classified as capital asset in this case. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner