Tax Consequence of a Bank's Acquisition of Ownership of Parcels of Land

September 19, 1988 BIR RULING NO. 459-88 21 (e) 123-86 459-88 Gentlemen : This refers to your letter dated January 22, 1988 stating as follows: "1. Messrs. Mely H. Tomas, Moises G. Petilla and Briccio T. Dava, Jr. each owed Perpetual Savings Bank the amount of Two Million Thirty Nine Thousand One Hundred Thirty and 43/100 Pesos (P2,039,130.43) as of 29 May 1984 or the total amount of Six Million One Hundred Seventeen Thousand Three Hundred Ninety One and 29/100 Pesos (P6,117,391.29); cdtech "2. Of this obligation, the total amount of Five Million Five Hundred Twenty Eight Thousand Two Hundred Sixty and 86/100 Pesos (P5,528,260.86) was settled on 29 May 1984 by way of dacion en pago of seventy-seven (77) titled parcels of land situated at San Isidro Rodriguez, Montalban, Rizal (5 parcels); Loyola Grand Villas, Q.C. (1 parcel), San Jose, Montalban, Rizal (61 parcels); Caloocan City (3 parcels); Bo. Muzon, Bulacan (3 parcels); Sta. Ana, Manila (1 parcel); Binmaley, Pangasinan (1 parcel); Sta. Ana, Pateros (1 parcel) and Pantay, Teresa, Rizal (1 parcel); "3. The dacion en pago was executed by Inter-Alia Management Corporation and five (5) individuals, in whose names the decioned (sic) titled lands were registered; "4. The seventy-seven (77) parcels of land were decioned (sic) for the total consideration of Five Million Five Hundred Twenty Eight Thousand Two Hundred Sixty and 86/100 Pesos (P5,528,260.86) which was applied as payment for the loan of the above three (3) debtors of the bank. However, the Deed of Dacion en pago failed to specify the corresponding value assigned to each dacioned title. Instead, the dacioned properties were identified as to the TCT No., location and are (in sq. m.) of each; "5. At the time the dacion en pago was executed, banks were allowed by the BIR to register foreclosure sales and consolidate titles to foreclosed properties even if the individual Sellers failed to pay the capital gains tax and documentary stamp tax. (RMO No. 33-82); "6. Shortly after the dacion en pago was executed, Perpetual Savings Bank was placed by the Central Bank under Receivership and subsequently, under Liquidation. In view of certain misunderstandings between the lawyers who effected the dacion en pago in behalf of PSB, and the PSB Receiver Liquidator, however, PSB failed to recover the original Deed of Dacion En Pago and the corresponding Transfer Certificate of Title (TCT) pertinent thereto, until recently. This in turn caused the delay in addressing the issue of tax payments and registering the titles in the name of PSB for purposes of selling the same as required by law. "7. Upon receipt of the aforesaid Deed of TCTs, PSB immediately conducted documentary verification and ocular inspection thereon and discovered that some of the TCTs dacioned to it are actually fictitious or fake titles."' In connection therewith, you now posed the following queries: "1. Where a bank (now under liquidation) acquired ownership over seventy-seven (77) parcels of titled land by dacion en pago (under one document) from a corporation and various individual owners on 29 May 1984 , who has the burden of paying the capital gains and documentary stamp taxes the Sellers or the Bank? "2. If the bank is not liable for such taxes since it is the BUYER not the Seller in the sale, can said bank register the dacion en pago if the Buyers do not pay aforesaid taxes? "3. If the bank cannot register the dacion en pago without itself paying the aforementioned taxes, can it make such payment directly with the National Office instead of the respective Revenue District Offices pertinent to the titles involved, considering that the seventy-seven (77) parcels are distributed all over Metro Manila and Luzon? "4. Where the dacion en pago failed to specify the equivalent value assigned to each of the seventy-seven (77) parcels but only indicated the areas ( in sq . m .) of each, what is the basis for determining the capital gains and documentary stamp taxes, where: "4.1. Some of the seventy-seven (77) titles were dacioned by a corporation hence are not subject to capital gains tax at all; "4.2. Some of the seventy-seven (77) titles turned out to be fictitious or false and hence must be deducted from the seventy-seven (77) titles." In reply, please be informed that pursuant to RMO Nos. 33-81 and 18-82, the Bureau of Internal Revenue shall allow the registration of the foreclosure sale and ultimately, the consolidation and issuance of title in favor of banks, insurance and finance companies, without the immediate payment of the capital gains tax on the foreclosed real property given as collateral in a real estate mortgage, in accordance with the procedure prescribed by said Revenue Memorandum Orders (BIR Ruling No. 313-87). Since there are no foreclosure sale and foreclosed real property RMO Nos. 33-81 and 18-82 do not apply in this case. cdta Under then Section 34(h) of the Tax Code, every individual who is a citizen of the Philippines, deriving net capital gains from sale or other disposition of real property shall pay a final capital gains tax. Accordingly, the transfer of property through "Dation in payment" is subject to the said final capital gains tax, and therefore, the various individual owners of real property from whom your client acquired the same by way of "Dation in payment" are liable to pay the capital gains tax on the net gains realized from the transfer of their property, taking into consideration the outstanding balance of their loans as the selling price to your client before title thereto can be consolidated and issued in your clients name. (BIR Ruling No. 123-86) Moreover, under the last paragraph of then Section 34(h) of the Tax Code, no registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported and the tax herein imposed, if any, has been paid . Furthermore, the return shall be filed with the Revenue District Officer, Collection Agent or duly authorized treasurer of the Municipality in which the various individual owners of real property from whom your client acquired the same by way of "Dation in payment" has their legal residence or principal place of business within 30 days following the sale (Dation in payment), and the total amount of tax due shall be paid on the date the return is filed by the said individuals. Finally, the Deed of Dacion En Pago is subject to documentary stamp tax based on the consideration or value received or paid for the property or the selling price pursuant to then Section 245 of the Tax Code, which tax is payable by either party to the said sale (Dation in payment). Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner