BIR Ruling [UN-113-94]

April 4, 1994 BIR RULING [UN-113-94] Atty. Alejandro S. Bonifacio Suite 702 Associated Bank Bldg. Quintin Paredes St. Binondo, Manila S i r : This refers to your request for a ruling as to whether or not your clients are subject to the capital gains tax on the transfer under expropriation proceedings of their real properties in favor of the government; and in the affirmative, for a waiver of the penalties interests and surcharges since your clients have not been paid yet by the government of their just compensation for said expropriated lands. cdtech It is represented that your clients are lot owners whose lands were appropriated by the government under Civil Case No. 3679 for Eminent Domain filed in the Regional Trial Court of Aklan, for the extension of the runway of the Kalibo Airport, Kalibo, Aklan; that just compensation of P20.00 per square meter was awarded to them in the said case; that the Airport Transportation Office which was tasked to pay the individual lot owners, required them to executive a deed of sale of their corresponding lots in favor of the government; that, accordingly, deeds of sale were executed on November 8, 1993 which were approved by the Office of the Secretary (DOTC); and that when the same were forwarded to the Revenue District Office in Kalibo, Aklan, for the assessment of capital gains tax, the Revenue District Officer's assessment included the following items 20% compromise penalty for late filing and late payment; documentary stamps; 25% surcharges; and, certification fee and DS. It appears that the lot owners have not been paid yet by the government inspite of the fact that the latter took possession of their lots sight (8) years ago. In reply thereto, please be informed that since the property of your clients are sold to the government pursuant to an expropriation proceedings, their tax liability on the gain derived from such sale shall be determined either under Section 21(a) of the Tax Code, or under Section 21(e) of the same Code, at the option of your clients. Either way, the valuation of the real property should be based on the just compensation paid to the lot owners. In this case, the just compensation is determined by the court to be P20.00 per square meter; hence, the computation of the capital gains tax as well as the documentary stamp tax should be based on such valuation. Although the various Deeds of Sale were executed by the parties as early as November 8, 1993, since these were part of the administrative procedures to effect the release of funds for payment to the lot owners, the actual payment by the government instead of the execution thereof shall be considered as the event that shall give rise to the imposition of the applicable taxes. Before actual receipt of the consideration in cases of eminent domain, the contract of Sale is considered not yet consummated thus, the imposition of surcharges and interests for late filing and/or payment of the capital gains tax and documentary stamp taxes are not justified. Accordingly, this Office hereby allows the registration of the deeds of sale with the Register of Deeds and consequently, the transfer of the property in favor of the government. Thereafter, upon submission of new certificates of title in the name of the government at which time, payment of the expropriated property can be effected, your clients shall file the corresponding capital gains tax returns within thirty (30) days from said submission of the certificates of title. The Department of Transportation and Communications (DOTC) shall within the same period, withhold the capital gains tax due from your clients and remit the same to the Bureau. The capital gains tax is 5% based on the actual amount of the purchase price. Accordingly, your clients will have to pay 5% capital gains tax on the purchase/selling price at the time of sale without any penalties, surcharges and interests (B.I.R. Ruling No. 082-87 dated March 19, 1987). In this connection, it may be stated that this ruling applies only to sales of property in favor of the government wherein the contract of sale stipulates that the seller shall not be paid until title to the property is transferred to the government. cdtech Very truly yours, ALICIA P. CLEMENO Head, Executive Revenue Assistant Officer-in-Charge (Legal Service)