BIR Ruling [UN-065-95]

February 14, 1995 BIR RULING [UN-065-95] Development Bank of the Philippines Makati, Metro Manila Attention: Mr . Bonifacio M . Abad First Vice President Gentlemen : This refers to your letter dated May 3, 1994 stating that you foreclosed and acquired a commercial lot and building located along McArthur Highway, Matina, Davao City covered by TCT No. 55907, registered in the name of the Spouses Antonio P. Baysa and Dominica P. Baysa, for P668,132.00 as highest bidder in the auction sale conducted on March 30, 1984; that the Certificate of Sale dated March 30, 1984 was registered with the Register of Deeds of Davao City on May 2, 1984; that the one-year redemption period expired on May 2, 1985 and the Spouses Baysa did not exercise their right of redemption; that the Deed of Consolidation of Ownership together with the supporting papers for registration were presented to the local BIR Office for assessment of taxes; that Atty. Franklin Ladores of the BIR made the following assessment: 1. Capital Gains Tax P48,252.80 2. Donor's Tax 576,127.00 3. Documentary Stamp Tax 16,858.00 Total Amount of Tax P641,237.80 ========= that Atty. Ladores explained that the donor's tax of P576,124.00 was based on the amount of P1,439,068.00 which is the difference between the fair market value of P2,107,200.00 less the acquisition cost of P668,132.00, that you argued that under Revenue Memorandum Order No. 41-91, among the exceptions to the use of zonal valuation as tax base in computing the capital gains tax/creditable withholding tax and documentary stamp tax on sale/exchange and other disposition of realties are those of realties effected through public bidding, e.g., judicial sale or extrajudicial foreclosure sale where both the 5% capital gains tax/creditable withholding tax and documentary stamp tax are computed based on the highest or winning bid price; that you likewise argued that RMO No. 33-81 as amended by RMO No. 18-82 allowed the issuance of a Certificate Authorizing the Transfer of Title to Real Property classified as capital asset even before the payment of the capital gains tax if foreclosed by a bank, financial or insurance company thru a foreclosure sale; that you are of the opinion that the imposition of donor's tax by Atty. Ladores is arbitrary in nature considering that Section 91 of the National Internal Revenue Code refers to transfer of property by gift which is essentially voluntary in nature as distinguished from a transfer of property by extrajudicial foreclosure sale which is by nature involuntary; and that Atty. Ladores refused to agree with your contention and insisted on his aforestated computation. Based on the foregoing representations, you are now requesting for a ruling on your following queries: "1. What should be the tax base for computing documentary stamp tax that DBP should pay in this case? "2. Is the procedure prescribed by RMO No. 33-81 as amended by RMO No. 18-82 applicable to this case? "3. Is DBP liable to pay the Donor's Tax considering that the Bank acquired ownership over the former property of the Spouses Baysa through extrajudicial foreclosure sale and not a "transfer by gift"? "4. If DBP is liable to pay the Donor's Tax, what would be the legal basis for imposing the same?" In reply, please be informed that your above-quoted queries are answered as follows: 1. Under Revenue Memorandum Order No. 41-91 in all cases involving sale, exchange, or any disposition of real property, the tax base for documentary stamp tax purposes shall be the same as the tax base used in the computation of the capital gains tax which means, gross selling price, fair market value, or zonal value of the real property, whichever is higher, except in cases, among others, where the sale of real property was effected through public bidding, e.g., judicial sale; extrajudicial foreclosure sale, where both the 5% capital gains tax and the documentary stamp tax are computed based on the highest or winning bid price. Accordingly, the tax base for computing documentary stamp tax due in this case shall be the highest or winning bid price. (BIR Ruling Nos. 101-89 and 118-91) 2. The procedure under Revenue Memorandum Order No. 33-81 as amended by Revenue Memorandum Order No. 18-82 allowing the issuance of a Certificate authorizing the transfer of title to real property classified as capital asset even before the payment of the capital gains tax if foreclosed by a bank, finance or insurance company thru a foreclosure sale is applicable in this case, considering that the property in question was sold in favor of DBP at a foreclosure sale held on March 30, 1984. (BIR Ruling No. 255-88, dated June 10, 1988) 3. DBP is not liable to pay the donor's tax of P576,124.00 based on the amount of P1,439,068.00 which is the difference between the fair market value of P2,107,200.00 less the acquisition cost of P668,132.00 of the property in question since the aforesaid property is a capital asset referred to under Section 21(e) of the Tax Code as amended, which under Section 93 of the same Code is specifically excluded from the payment of donor's tax as a transfer of property for less than adequate and full consideration in money or money's worth. 4. Your query No. 4 is no longer relevant in view of the answer to query No. 3. cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)