BIR Ruling No. 360-11

September 30, 2011 BIR RULING NO. 360-11 Section 24 (D) (1), 188 & 196 of the Tax Code of 1997; Article 725, 1345 and 1346 of the New Civil Code; Title III, Chapter II of the Tax Code of 1997, as amended Inso & Associates 4/F Cebu CFI Community Cooperative Bldg. Capitol Compound, Cebu City Attention: Atty. Manuelito S. Inso Gentlemen : This refers to your letter dated September 2, 2009, indorsed to this office from BIR Region No. 13, requesting for exemption from the payment of capital gains and documentary stamp taxes on the reconveyance of a real property in favor of your clients Sps. Vicente Tiu and Teresita Uy-Tiu, which was executed pursuant to an Order issued by Branch 20 of the RTC of Cebu City. The antecedent facts as represented are as follows: Vicente Tiu, with Taxpayer Identification No. (TIN) 106-132-439-000 and Teresita Uy-Tiu, with TIN 108-484-006-000 ,were the registered owners of a vacant lot designated as Lot 12-A, located at Barrio Kasambagan, Mabolo, Cebu City, containing an area of 1,036 square meters, more or less and covered by TCT No. 117345, with the corresponding Tax Declaration (Tax Dec.) No. GR2K-03-021-02684; On December 6, 2004, Sps. Vicente Tiu and Teresita Uy-Tiu executed a Deed of Absolute Sale in favor of their son, Sean Paul U. Tiu over a portion of the aforesaid lot now designated as Lot 12-A-1 with an area of 547 square meters, more or less ( Subject Lot ),and on the same instrument, Lot 12-A-2 representing the remaining area of 489 square meter was conveyed and sold in favor of Heleno Tan Tiu. All expenses including the capital gains and documentary stamp taxes were fully paid by Sps. Vicente Tiu and Teresita Uy-Tiu. The ownership of the Subject Lot was consolidated in favor of Sean Paul U. Tiu who was issued TCT No. 172204. However, on December 4, 2004, barely seven (7) months after the execution of the Deed of Absolute Sale, Sean Paul U. Tiu died, leaving his wife, Jennifer Co-Tiu and his minor daughter, Jaidenne Sydney C. Tiu to inherit the Subject Lot as well as other real properties which became a subject of an Extrajudicial Settlement of Estate dated May 10, 2005. After complying with all the requirements for the payment of the estate tax, the Subject Lot was issued a new title, TCT No. 178934 with a corresponding Tax Dec. bearing No. GRC6-03-021-03621, in the name of Jennifer Co vda. de Tiu. ScaHDT On October 16, 2007, Jennifer Co vda. de Tiu waived Twenty-Five (25%) of her right over of the undivided share of the Subject Lot in favor of her minor child, Jaidenne Sydney C. Tiu. For the alleged failure of Sean Paul U. Tiu to pay the price of the aforesaid lot, the Sps. Vicente Tiu and Teresita Uy-Tiu ( Plaintiffs ) filed a civil case for Annulment of Deed of Absolute Sale, Declaration of Nullity of TCT No. 178934 and Reconveyance of Property against Jennifer Co vda. de Tiu in her individual capacity and in her capacity as the natural guardian of Jaidenne Sydney C. Tiu ( Defendants ) before Branch 20 of the RTC of Cebu City. On the 25th of May 2009, upon a Joint Motion for Summary Judgment filed by both the Plaintiffs and the Defendants, the Branch 20 of the RTC of Cebu City issued an order declaring the purported sale of the Subject Lot to the late Sean Tiu by the Plaintiffs-Spouses Vicente Tiu and Teresita Uy-Tiu, SIMULATED. Further, the RTC of Cebu City ordered the reconveyance of the Subject Lot to the Plaintiffs based on the Compromise Agreement dated February 9, 2009, executed by the both the Plaintiffs and the Defendants ,wherein the Defendants waived the ownership of the lot in favor of the Plaintiffs . 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: ..." Since the reconveyance of the real property is in pursuance of a court order, the transfer of the said property in favor of the Plaintiffs 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. The reconveyance 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. Furthermore, Article 1345 and Article 1346 of the New Civil Code provides, viz.: Article 1345 Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. Article 1346 An absolutely simulated or fictitious contract is void. A relative simulation ,when it does not prejudice a third person and is not intended for any purpose contrary to law, morals good customs, public order or public policy binds the parties to their real agreement . A simulated contact with legal effect is a relative contract ,a contract where the parties conceal their true agreement, but nevertheless binds such parties to their real agreement. Based on the foregoing, plus the fact that: 1) The absence of consideration of the aforementioned sale as alleged by the Plaintiff; 2) Corroborated by the admission of the Defendant ,Jennifer Co vda. de Tiu in the Compromise Agreement that she could not produce any proof that indeed her late husband paid any consideration therefore; 3) The declaration by the RTC of Cebu City that "the purported sale of Lot 12-A-1, presently covered by TCT No. 178934 to the late Sean Tiu by the Plaintiffs-Spouses Vicente Tiu and Teresita Uy-Tiu ,which was declared by the RTC of Cebu City, as SIMULATED. CASaEc 4) Article 725 of the New Civil Code which provides that, "Donation is an act of liberality whereby one person disposes gratuitously of a thing or right in favor of another, who accepts it." This office is of the opinion that the abovementioned purported sale whereby the Sps. Vicente and Teresita Uy-Tiu transferred in favor of Sean Paul U. Tiu a portion of Lot 12-A-1, is in fact a DONATION or an act of liberality whereby one person disposes gratuitously of a thing or right in favor of another, who accepts it (Art. 725 of the New Civil Code) , and should be subjected to the proper DONOR'S TAX provided in Title III, Chapter II of the Tax Code of 1997, as amended. In the same token, the waiver of Jennifer Co vda. de Tiu of her right over the undivided share of the subject lot equivalent to 25% in favor of her minor child, Jaidenne Sydney C. Tiu is also a DONATION, and should likewise be subjected to the proper DONOR'S TAX as provided in Title III, Chapter II of the Tax Code of 1997, as amended. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue