BIR Ruling No. 436-11

November 9, 2011 BIR RULING NO. 436-11 Secs. 24 (D) (1) and 27 (D) (1) of the Tax Code of 1997, as amended; BIR Ruling No. 201-87; BIR Ruling No. 009-10; BIR Ruling No. DA-(I-047) 571-08; BIR Ruling No. DA-419-98 Ruth L. Guingona City Mayor Gingoog City Madam : This refers to your letter dated January 28, 2011, endorsed by Revenue Region 16-Cagayan de Oro City, requesting exemption from capital gains tax on your exchange of properties. It is represented that Gingoog City is the lawful owner of a parcel of land, described as Lot No. 1-C-1 which is a portion of Lot 1-C, PSD-10-029634 containing an area of sixteen thousand five hundred thirty six (16,536) sq. m. covered by Transfer Certificate of Title (TCT) No. T-13087. On the other hand, Dr. Ryan R. Mortiz is the lawful owner of a parcel of land described as Lot 1, which is a portion of Lot Nos. 5-C, 5-D, 5-E, and 5-F, all of PSD-192249, containing a total area of twenty thousand (20,000) sq. m. covered by TCT Nos. T-14677, T-14468, T-14465 and T-14470. On August 24, 2010, the City Government of Gingoog and Dr. Ryan R. Mortiz voluntarily agreed to exchange their respective properties for the proposed cemetery situated at Barangay San Miguel, Gingoog City by virtue of Deed of Exchange pursuant to City Council Resolution No. 2005-295 dated September 16, 2005. In reply, please be informed that Section 24 (D) (1) of the Tax Code of 1997 provides that 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 trust, shall be taxed at the rate of 6% based on the gross selling price or the fair market value as determined in accordance with Section 6 (E) of this Code, whichever is higher. (BIR Ruling No. DA-(I-014) 202-09 dated April 21, 2009) cTESIa As represented, the parties executed the Deed of Exchange for the proposed cemetery. It has been the consistent stance of this Office that an exchange of properties between two (2) parties is subject to capital gains tax and the corresponding documentary stamp tax based on the fair market value of their respective properties as determined in accordance with Section 6 (E) of the NIRC of 1997, as amended. (BIR Ruling No. 201-87 dated July 13, 1987). Inasmuch as the exchange of properties between Dr. Ryan R. Mortiz and City Government of Gingoog for the proposed cemetery in Barangay San Miguel, Gingoog City, partakes the nature of voluntary exchange, it is subject to the aforesaid taxes. (BIR Ruling No. DA-(I-047) 571-08 dated December 23, 2008) Accordingly, Dr. Ryan R. Mortiz may opt to report the gain realized in the exchange in the manner provided for under Section 24 (A) (1) of the Tax Code, as amended. Under Section 24 (D) (1) of the Tax Code, as amended, an individual taxpayer has the option to report his tax liabilities, if any, on gains realized on dispositions of real property to the government or any of its political subdivisions or agencies either as a transaction subject to capital gains tax of 6% under Section 24 (D) (1) of the Tax Code, as amended, or under Sec. 24 (A) (1) thereof and the corresponding documentary stamp tax prescribed in Section 196 of the same Code. On the other hand, the City Government of Gingoog shall be subject to the capital gains tax of 6% imposed under Section 27 (D) (5) of the Tax Code of 1997 on the capital gains presumed to have been realized from the said exchange transaction of real property considered as capital assets. This is because only the income derived by the local government unit from the exercise of its essential governmental function shall be excluded from its gross income pursuant to Sec. 32 (B) (7) (b) of the Tax Code of 1997. (BIR Ruling No. DA-419-98 dated September 14, 1998 and BIR Ruling No. 009-10 dated June 3, 2010) Regrettably, your request that you be exempted from the payment of capital gains tax and documentary stamp tax is hereby denied for lack of legal basis. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue