Clarification of BIR Ruling No. 223-87

December 28, 1987 BIR RULING NO. 424-87 21 (e) 223-87 424-87 Gentlemen : This refers to your letter dated September 28, 1987 requesting clarification as to whether BIR Ruling No. 223-87 dated August 3, 1987 addressed to the Administrator of the National Land Titles and Deeds Registration Administration (NALTDRA) pertinent portion of which is quoted hereunder as follows: "In reply, I have the honor to inform you that on the premise that the amount representing the capital gains tax forms part or is tacked with the real property which is already under the control and custody of the financial institutions, i.e., banks, finance companies and insurance companies as mortgagee-transferee , the said mortgagee-transferee shall pay the 5% capital gains tax based on the selling price shown in the mortgage foreclosure sale (Revenue Memorandum Order No. 29-86)" (emphasis supplied): refer only to cases where the purchaser at a foreclosure sale takes possession of the foreclosed mortgaged real property during the period of redemption. In reply, please be informed in the negative. A mortgage foreclosure sale is a form of conditional sale transaction (Revenue Memorandum Circular No. 41-86). The 5% capital gains tax is imposed on "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. (Sec. 21(e), Tax Code, as amended by Executive Order No. 37). Accordingly, the 5% capital gains tax is due on the selling price shown in the mortgage foreclosure sale. In other words, the tax should be paid after said foreclosure sale but before the registration of the certificate of sale issued by the auctioneer conducting the foreclosure sale. (BIR Ruling No. 138-87) The phrase "on the premise that the amount representing the capital gains tax forms part or is tacked with the real property which already is under the control and custody of the financial institution as mortgagee-transferee . . ." (Sec. 3(3.1) RMO No. 29-86) does not imply physical possession of the mortgaged property by the financial institution. The fact that the financial institution is the mortgagee-transferee implies that it has the control and custody of the mortgaged property. As such, the said financial institution shall pay the 5% capital gains tax based on the selling price shown in the foreclosure sale. If the mortgaged property is redeemed by the mortgagor within the period of redemption, the 5% capital gains tax paid by the financial institution and/or the mortgagor is not refundable for the reason that, at the time of payment, the tax was legally due. The fact that the mortgagor thereafter redeemed the property did not render the collection of the tax illegal or erroneous so as to entitle the payor to a refund. It is noted that the present law [Sec. 21(e), Tax Code, as amended] now imposes the capital gains tax on dispositions of real property classified as capital assets, including pacto de retro sales and other forms of conditional sales , which transactions do not necessarily involve absolute dispositions of real property. cdtai Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner