Deed of Reconveyance Returning the Property to Seller is Not Subject to Capital Gains Tax and Documentary Stamp Taxes

November 13, 1987 BIR RULING NO. 362-87 21 (e) 000-00 362-87 Gentlemen : This refers to your letter dated August 4, 1987 stating that between you (Seller) and Virgilia H. Garcia (Buyer), a lot was to be purchased with Pag-ibig loan proceeds applied by the buyer; that since the Pag-ibig loan and lot-purchase scheme requires the borrower/lot buyer to hold the title to the property to be mortgaged or given as collateral for the loan, you executed a Deed of Absolute Sale on the aforesaid lot in favor of Pag-ibig loan borrower, Virgilia H. Garcia; that after the latter effected the transfer of title in her name, she executed a loan and mortgage agreement dated March 31, 1986 with Philippine Commercial International Bank (PCIB) as originating bank, giving the aforesaid lot as security; that in accordance with the terms of said loan and mortgage agreement, PCIB will eventually assign/transfer said loan agreement and the corresponding promissory notes to the National Home Mortgage Finance Corporation (NHMFC) so that the proceeds will be finally paid to you; that in the instant case, the release of loan proceeds was overtaken by the Edsa Revolution and exhaustion of NHMFC's loanable funds; that as a result thereof, PCIB bank cancelled the loan and released the said lot from encumbrance and by reason thereof, Virgilia Garcia, eventually executed a Deed of Reconveyance dated July 15, 1987 returning the aforesaid lot to you. Based on the foregoing facts, you request for a ruling on the following questions: 1. Considering that sale has not been consummated, is the reconveyance still subject to capital gains tax? 2. Should the payment of documentary stamps be based on the amount appearing in the tax declaration or on the selling price? In reply, please be informed that the Deeds of Sale executed by you in favor of Mrs. Garcia did not produce any legal effect because, with the cancellation of the loan by NHMFC, you failed to receive the proceeds which was to be the cause for the sale. For lack of cause, it cannot be said that your property has been disposed, transferred or conveyed in favor of Mrs. Garcia pursuant to Article 1352 of the Civil Code stating: adc "Art. 1352. Contracts without cause , or with unlawful cause, produce no effect whatever. xxx xxx xxx Consequently, since the Deed of Sale between you and Mrs. Garcia failed to effect the transfer of ownership of the lot for lack of cause/consideration, the Deed of Reconveyance was subsequently executed by Mrs. Garcia on July 15, 1987 so as to effect the return of the subject property to you. Accordingly, said Deed of Reconveyance is not subject to the capital gains tax and documentary stamp taxes prescribed in Sections 21(e) and 209 of the Tax Code, respectively. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner