Tax Consequences of Series of Transactions between DBP and Its Employees

December 28, 1992 BIR RULING NO. 372-92 21 (e) 000-00 372-92 Mr. Ignacito A. Lopez, Jr. 12 City Camp Proper Baguio City S i r : This refers to your letter dated January 30, 1991 stating that on November 25, 1980, your mother-in-law, Mrs. Teodora F. de Guzman, executed a deed of sale in favor of the Development Bank of the Philippines (DBP) covering a parcel of land under Certificate of Title No. P-1231, including improvements in consideration of P120,000.00; that your mother-in-law granted her consent for you and your wife to build your residential house on the unoccupied portion of the said parcel of land; that in order for you to avail of the housing program being given by the DBP to its employees, your mother-in-law executed the aforesaid deed of sale by way of accommodation with the private understanding that the property would be reconveyed to her upon completion of the house you and your wife planned to build on the said parcel of land, and upon full payment of the housing loan you intended to secure from the DBP; that on December 10, 1980, DBP executed a deed of conditional sale over the aforesaid property in your favor; that under the terms of this contract, the proceeds of the housing loan granted by DBP in your favor would be used to acquire the house and lot covered by OCT No. P-1231 and that said loan would be amortized over a period of twenty five (25) years; that relative to your approved housing loan, you executed on December 11, 1980 three (3) separate promissory notes, two (2) for the amount of P30,000 each and the third for P60,000.00; that on January 19, 1990, DBP executed a deed of absolute sale reconveying the aforementioned property to you in consideration of P120,000, the same amount of loan granted to you by DBP which you fully paid on the same date (January 19, 1990); and that the housing program established by the DBP for its employees is exemplified in the certification issued by Atty. Rolando D. Mendoza Acting Branch Head, DBP, Baguio City on November 13, 1990 to the effect that "before any release of loan proceeds, it is required that the certificate of title over the real estate property must first be transferred in the name of the DBP, to be reconveyed by the Bank to the employee-borrower upon full payment of the account." Based on the foregoing representations and on copies of documents submitted, you now in effect request a ruling whether under the individual Housing Program of the DBP for its employees, the series of transactions above described between DBP and its employees is a pure and simple loan, or as sale of realty subject to capital gains tax, withholding tax or income tax, as the case may be, specifically the Deed of Absolute Sale executed by DBP on January 19, 1990; and will the subsequent transfer or reconveyance of the aforementioned parcel of land alone, exclusive of the improvements introduced from the proceeds of DBP housing loan, to be made by you in favor of your mother-in-law, Mrs. Teodora T. de Guzman, in restoring to her the ownership of the lot in question is subject/exempt from the payment of the capital gains tax or the donor's tax considering that the same came into your possession by way of pure and simple accommodation. In reply, please be informed that the sale executed by your mother-in-law in favor of the DBP on November 25, 1980 of her parcel of land covered by OCT No. P-1231, including improvements thereon appears to be subject to the then net capital gains tax imposed under Section 34 (h) of the Tax Code considering that said sale transaction involved, transfer of ownership over the said realty from your mother-in-law, Mrs. Teodora F. de Guzman to the DBP. However, since there is no monetary consideration involved in the said sale transaction as the same was executed by the said seller merely to accommodate you and your wife in order for you to avail of the DBP's Housing Program for its employees wherein it is required among others that the realty that secures the housing loan must first be transferred in favor of the DBP as collateral for the loan, this Office is of the opinion as it hereby holds that said sale transaction is not subject to income tax and consequently to the then capital gains tax prescribed under Section 34 (h) of the Tax Code. The same is also true with respect to the conditional sale of the said realty executed by DBP in your favor on December 10, 1980 as well as the absolute sale of the same realty executed by DBP in your favor on January 19, 1990 upon your full payment of your housing loan under the DBP's Housing Program for its employees considering that there is likewise no monetary consideration involved in both of the said sale transactions since the conditional sale executed by the DBP in your favor on December 10, 1980 is conditioned upon your utilizing the proceeds of the housing loan you obtained from DBP to the acquisition of the house and lot covered by OCT No. P-1231 which is the very purpose of your application for said housing loan while the Deed of Absolute Sale executed by DBP in your favor on January 19, 1990 was merely a release of the collateral used to secure the housing loan you obtained from the DBP. Hence, both sale is not likewise subject to income tax and consequently, to the creditable withholding tax imposed under Revenue Regulations No. 1-90 which became effective beginning January 1, 1990. Moreover, the subsequent transfer or reconveyance of the said realty excluding the improvements you have introduced thereon from the proceeds of the DBP housing loan you obtained, in favor of your mother-in-law, Mrs. Teodora F. de Guzman restoring to her the ownership of her realty covered by OCT No. P-1231 being likewise without any monetary consideration as the same would merely be a restoration of her ownership over the said realty which she transferred to the DBP merely to accommodate you in obtaining a housing loan from the said bank is not subject to neither the 5% capital gains tax imposed under Section 21(c) of the Tax Code nor to the donor's tax imposed under Section 91 of the same Code considering that there is no intention to donate in this case. Furthermore, all of the deeds executed on the said sale transactions including the deed to be executed to restore the ownership of the realty in the name of your mother-in-law, being without any monetary consideration which presupposed the absence of a purchaser or person designated by such purchaser which would give rise to the imposition of the documentary stamp tax prescribed under then Section 245 (now 196) of the Tax Code is subject to the documentary stamp tax of P3.00 under then Section 237 (now Section 188) of the Tax Code. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue