BIR Ruling No. 386-12

June 6, 2012 BIR RULING NO. 386-12 Secs. 24 (D) (1), 56 (A) (3); 196 of the Tax Code, as amended; Sec. 263 of R.A. 7160; BIR Ruling No. 224-11 Helen T. Rosales Office of the City Treasurer City Hall, Naga City Madam : This refers to your letter dated September 12, 2011 requesting exemption from payment of capital gains tax and documentary stamp tax on real properties forfeited by the City Government of Naga for nonpayment of real property tax. Documents submitted disclose that the City Government of Naga has the following inventory of real properties forfeited by the city due to tax delinquency in real property taxes pursuant to Section 263 of the Local Government Code (LGC): TCT No. T.D. No. Sq. M. 1. Fausto, Adelita 29058 08-02-0022-00456 1,079.00 2. Fausto, Adelita 30319 08-02-0022-00460 166.00 3. Fausto, Adelita 31288 08-02-0022-00467 216.00 4. Fausto, Adelita 27381 08-02-0022-00414 1,544.00 5. Fausto, Adelita 26088 08-02-0022-00451 1,494.00 6. Macaraig, Gemma 08-01-0008-02277 176.40 7. Florendo, Danilo & Luzviminda 08-02-0022-01334 151.70 8. Badong, Remegio 08-02-0023-00340 72.00 9. Bondalo, Rosario 08-02-0022-00333 699.00 Date of Public Date of Final of Sale Conveyance 1. Fausto, Adelita 12-19-08 11-11-10 2. Fausto, Adelita 12-19-08 11-11-10 3. Fausto, Adelita 12-19-08 11-11-10 4. Fausto, Adelita 12-19-08 11-11-10 5. Fausto, Adelita 12-19-08 11-11-10 6. Macaraig, Gemma 5-29-09 11-10-10 7. Florendo, Danilo & Luzviminda 12-19-08 11-10-10 8. Badong, Remegio 12-19-08 11-10-10 9. Bondalo, Rosario 12-19-08 11-10-10 that the city seeks to register in its name with the Register of Deeds said forfeited properties. Hence, this request. TCaEIc In reply, please be informed that Section 263 of R.A. 7160 or the Local Government Code of 1991 provides that: "SEC. 263. Purchase of Property by the Local Government Units for Want of Bidder. In case there is no bidder for the real property advertised for sale as provided herein, or if the highest bid is for an amount insufficient to pay the real property tax and the related interest and costs of sale the local treasurer conducting the sale shall purchase the property in behalf of the local government unit concerned to satisfy the claim and within two (2) days thereafter shall make a report of his proceedings which shall be reflected upon the records of his office. It shall be the duty of the Registrar of Deeds concerned upon registration with his office of any such declaration of forfeiture to transfer the title of the forfeited property to the local government unit concerned without the necessity of an order from a competent court. Within one (1) year from the date of such forfeiture, the taxpayer or any of his representative, may redeem the property by paying to the local treasurer the full amount of the real property tax and the related interest and the costs of sale. If the property is not redeemed as provided herein, the ownership thereof shall be vested on the local government unit concerned." From the foregoing provision, it is clear that when there are no bidders of a real property advertised for sale in the public auction, the local treasurer conducting the sale shall purchase the property in behalf of the local government unit (LGU). Section 24 (D) (1) of the Tax Code of 1997, as amended, on the other hand provides: "SEC. 24. Income Tax Rates . xxx xxx xxx (D) Capital Gains from Sale of Real Property . (1) In General. The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon 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: ...." ADEaHT In the case of a public auction, sale of the realty of the delinquent taxpayer is the enforcement by the LGU of its tax lien for unpaid real property taxes and is being conducted through public bidding or public auction sale. However, CGT is usually paid by the seller considering that it is imposed upon 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 such as mortgage foreclosure sales whether it is done judicially or extra-judicially. (BIR Ruling No. 224-11 dated July 12, 2011) In this case, while the Naga City Government is the statutory seller of the properties on public auction, the CGT and DST due on the said sale of the realty are for the account of the real property owner. However, since no redemptions were made by the owners of the subject properties after the issuance of "Certificates of Sale of Delinquent Properties" to Naga City Government and upon the Declaration of Forfeiture in its favor, ownership of such real properties shall be transferred in the name of said LGU pursuant to Section 263 of R.A. 7160, the Naga City Government is the one liable to pay the CGT and DST in order for the properties to be registered in its name. (BIR Ruling No. 224-11 dated July 12, 2011) As for the tax base in computing the CGT and DST on such sale transaction, it should, as in the case of mortgage foreclosure sale under Act No. 3135, as amended, be likewise on the highest bid price. Then again, there is no "highest bid price" in situation where the LGU purchases the property for want of bidder in the public auction. The tax base may then be based on the bid price in the auction sale or the zonal value of the forfeited property, whichever is higher. Thus, under Section 27 (C) of the Tax Code of 1997, as amended, all corporations, agencies or instrumentalities owned or controlled by the Government, except the GSIS, the SSS, the PHIC, and the PCSO shall pay such rate of tax upon their taxable income as are imposed upon corporations or associations engaged in a similar business, industry or activity. Likewise, under P.D. No. 1177, all units of government, including government owned or controlled corporations are subject to income taxes, customs duties and other taxes and fees as are imposed under revenue laws. IN VIEW OF THE FOREGOING, this Office regrets to deny your request for exemption from payment of capital gains tax and documentary stamp tax of real properties forfeited by the City Government of Naga for nonpayment of real property tax for lack of legal basis. AEIHaS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue