BIR Ruling [UN-146-95]

1995 BIR RULING [UN-146-95] Mr. Mannuel C. Natividad, Jr. Rm. 505 Burke Building Escolta, Manila S i r : This refers to your letters dated September 1, 1994 and January 2, 1995 requesting for a ruling that the expropriation of the property of your client, Prescila J. Nadera by the Isabela State University on May 1979 is exempt from the payment of capital gains tax. It is represented that your abovenamed client is the owner of a parcel of land containing an area of 22.6810 hectares situated at Echague, Isabela; that in 1978 the Isabela State University filed an expropriation proceeding in court to acquire forcibly the said property; that the Government, at the instance and for the benefit of the Isabela State University, took actual possession and occupation of the property on May 9, 1979 pursuant to P.D. No. 1533; that this started a long drawn court battle which was terminated only last 1991 by a decision rendered by the Court of Appeals; that up to the present, your client has not been fully paid allegedly due to budgetary constraint and the issue as to whether or not your client has to pay the capital gains tax on the acquisition of her property by the government; and that you are of the opinion that the expropriation of your client's property is exempt from the payment of capital gains tax for the following reasons: "1. Nature of transaction lacks the elements of sale. The price is not an amount which a seller is willing to sell to a buyer willing to buy. There is, therefore, no meeting of minds of the parties; "2. The property was acquired forcibly under the guise of the power of eminent domain. More or less, the property was confiscated, considering the harsh provisions of P.D. 1533 then applied to govern the acquisition; "3. Payment is subject to budgetary regulation. Even if the Court of Appeals already rendered its decision, still the expropriating agency did not provide sufficient funds in accordance with the said decision. As there is no appropriation for that purpose, the property owner has been reduced to a beggar, begging for her own money, as it were, which may not be forthcoming because of budget rules and procedures; "4. The property was acquired by the government. The transaction ends there. No other transaction, either for pecuniary gain or for recoupment, would ever follow. Besides, the government is exempt from taxes; "5. No deed of sale is executed by the property owner in favor of the condemnor. The Transfer Certificate of Title covering the property will be constituted or transferred in the name of the Isabela State University by an Order of the court to the Register of Deeds for Isabela; "6. That at the time of taking for purposes of ownership, there was no law as yet involving capital gains tax, it being enacted only September 7, 1979. As our laws, as a general rule, cannot be applied, retroactively, the transfer of the property of my client to the Isabela State University should not be subject to the capital gains tax; and "7. It may also be pointed out that although the consideration of the transfer is only being paid now, as of May 9, 1979, the property in question is already owned, actually and legally by the Isabela State University. This is bolstered by P.D. No. 1533, Section 2 thereof, the law applied in the expropriation proceedings which vests in the condemnor the "control and disposition of the real property and the improvement thereon, including the power of demolition, if necessary." This implies the right of jus utendi, jus abutendi, jus disponendi and jus vindicandi. Under this situation, it may also be added that "where all benefits have been taken away, the corresponding burdens should be assumed by the State "(City of Manila vs. Salvador Roxas Y Elio, et. al., 60 Phil. 215)." In reply, please be informed that then Section 34(b) [now Section 21(e)] of the Tax Code, which provides, viz: "(b) The provision of paragraph (b) of this Section to the contrary notwithstanding, net capital gains from the sale or other disposition of real property by citizens of the Philippines or resident alien individuals shall be subject to the final income tax rates prescribed as follows: NET CAPITAL CAPITAL GAINS RATES On the first P100,000 or less 10% On any amount over P100,000 20% Such tax shall be in lieu of the tax imposed under Section 21 of this Code: Provided, However, that the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 21 hereof or under this Section, at the option of the taxpayer; Provided, further, That if the taxpayer elects to report such gains in accordance with the provisions of Section 43(b), the amount of the tax which shall be paid on each installment shall be the proportion of the tax herein imposed, which the installment payment received bears to the total selling price; Provided, finally, The failure on the part of the seller to pay the tax imposed herein on any gains returnable under the installment method will automatically disqualify the seller-taxpayer from paying the tax in installment and the unpaid portion of the tax shall immediately be due and demandable. The tax herein imposed shall be returned and paid in accordance with Sections 45(c) and 51(A)(4) of this Code. xxx xxx xxx" took effect on September 7, 1979 (BP Blg. 37), hence this Office is of the opinion as it hereby holds that the expropriation by the Isabela State University of the aforesaid property of your client on May 9, 1979, when it actually took possession of the said property, is not subject to the capital gains tax imposed under the abovequoted provision of Section 34(h) of the Tax Code. However, any gains which might have been realized by your client on the aforesaid expropriation of her real property is subject to income tax under then Section 21 of the Tax Code using the income tax rate enforced as of May 9, 1979. (BIR Ruling No. 065-94 dated March 1, 1994) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)