BIR Ruling No. 102-87 (April 8, 1987)

21-n 000-00 102-87

S i r :

This refers to your letter dated February 17, 1987 requesting a ruling as to the nature of the rental income received by the heirs of the late Jose Lim and Petra Ramos from the properties they acquired by inheritance which has been the subject of adjudication and extra judicial partition.

It is represented that the late spouses Jose Lim and Petra Ramos are the owners of two parcels of land located within the commercial district of Laoag City; that the spouses derived rental income from the properties during their life time; that the properties were the subject of adjudication and extrajudicial partition by the heirs; and that the heirs are receiving rental income from the properties.

In reply, please be informed that since the properties left by the deceased spouses have been the subject of an extrajudicial settlement among the heirs who continued the business of their parents by receiving the rental income of the properties from the moment of such extrajudicial settlement, an unregistered partnership has been formed. Hence, the rental income derived from said properties constitute partnership income subject to corporate income tax imposed under Section 24(n) of the Tax Code. Thus, the Supreme Court, in the case of Ona vs. Commissioner, G.R. No. L-19342, May 25, 1972, ruled as follows:

“As already indicated, for tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for this is simple. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the income thereof, for each of them to manage and dispose of an exclusively his own without the intervention of the other heirs, and, accordingly, he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed.” cda

Very truly yours,

(SGD.) BIENVENIDO A. TAN, JR.

Commissioner

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BIR Ruling No. 101-80 (July 23, 1980)

Ms. Deryl Braithwaite

Cultural Attache

British Embassy

M a n i l a

S i r :

This refers to your letter dated May 22, 1980 requesting tax exemption on the sum of P100,000 which the British Community will donate to the Cultural Center of the Philippines (CCP) as a result of the presentation by one of your major British Companies, the Sadler’s Wells Royal Ballet, in Manila in September, 1980.

In reply, please be informed that since the aforesaid donation is being made to a cultural organization, the same is exempt from the donor’s gift tax, pursuant to Section 123(a)(3) of the Tax Code of 1977, as amended.

Moreover, since CCP is a non-municipal public corporation (Sec. 3, P.D. No. 15, as amended by P.D. No. 1444), it is a government agency. Accordingly, donations of members of the British Community to the CCP shall be deductible in full from the gross income of said members for income tax purposes, if said donations are given exclusively to finance, to provide for, or to be used in undertaking priority activities in culture according to a national priority plan to be determined by the NEDA. In case any such donation to CCP is not in accordance with the said annual priority plan, the same shall be subject to the 6% limitation prescribed in Section 30(h)(1) of the Tax Code. (Section 30(h)(2)(A) of the Tax Code of 1977, as amended by Batas Pambansa Blg. 45). aisadc

Very truly yours,

RUBEN B. ANCHETA

Acting Commissioner

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BIR Ruling No. 100-98 (June 29, 1998)

R.A. 6657 Sec. 98, NIRC’ 97-000-00-100-98

Ms. Angelita L. Amosco

Revenue District Officer

RDO No. 57, BIR

San Pedro, Laguna

M a d a m :

This refers to your letter dated December 26, 1996 stating that Science Park of the Philippines, Inc., (SPPI), a member of Investment and Capital Corporation of the Philippines (ICCP Group), as a precondition to the purchase of a tract of agricultural land, promised to relocate the tenants thereof and further promised to rebuild/replace their destroyed residential houses on the relocation site; that, thereafter, your Office, i.e., RDO No. 57 subjected the donations of lots made by SPPI in favor of the tenants to donor’s tax on stranger; that as regards the residential houses, which were built at the expense of SPPI replacing the destroyed houses, your Office did not impose the donor’s tax based on the following reasons, viz:

“1.            The company promised to relocate the tenants in other areas and destroyed their residential houses with the promise to rebuild/build their houses on the relocation site;”

“2.            The company immediately secured a building permit in 1991 and proceed with the rebuilding/building of the said replacement houses;” cdasia

“3.            The Municipal Assessor of Cabuyao, Laguna issued directly the tax declaration of the replacement houses in the name of the tenants in 1992 and 1994;

“4.            The company only made the actual donation of relocation site lots last September 17, 1996.”

that the documents and position paper by SPPI to this Office further disclosed that the purchased tract of land was an agricultural land covered by Comprehensive Agrarian Reform Program under R.A. 6657; that the relocation and donation of residential lots to the agricultural tenants and farm workers has been approved and cleared by the Department of Agrarian Reform (DAR) based on the information and findings gathered by the Municipal Agrarian Reform Office (MARO) in Cabuyao, Laguna relative to the application for conversion of the subject property into industrial use pursuant to E.O. No. 129-A, R.A. 6657 and Administrative Order No. 15 series of 1988; and that the findings which were significant in determining the plight of the agricultural tenants affected by the conversion and the availment of any incentive or exemption privilege under the law are as follows:

1.            The property subject of conversion from agricultural land planted with sugarcane, to industrial use is registered in the name of Benita P. Navarro and situated in Bo. Diezmo, Cabuyao, Laguna with a total area of 931,539 square meters;

2.            There had been 160 farm workers and about 80 families who occupied a portion of the property for residential purposes and who alleged that they had been occupying/working on the land for not less than 20 years;

3.            The land was the subject of a joint venture undertaking between the landowner and land developer, Investment and Capital Corporation of the Philippines (ICCP);

4.            On August 9, 1989, a referendum was conducted among the occupants/workers attended by 136 farm workers of whom 135 voted for the proposed conversion and one voted against the conversion; and

5.            The land is an agricultural land fully planted with sugarcane, the direct beneficiaries of which are the farm workers, occupants and residents therein. cda

that further, records and documents submitted and filed with the DAR, as stated in the Order Approving the Conversion, revealed the following:

1.            The subject property is within the Medium and Heavy industrial area delineated in the Zoning Map and Zoning Ordinance of the Municipality of Cabuyao, Laguna as certified by the Deputized Zoning Administrator, Mr. Generoso B. Opina on July 13, 1989;

2.            The Property was the subject of a petition by Diezmo Farm Workers Group requesting for acquisition of said land through the Comprehensive Agrarian Reform Program;

3.            However, the petitioner-farm workers/tenants later signed a “Salaysay” on July 2, 1989, attesting that they were not against the conversion of the subject land from agricultural to industrial use since they were promised by ICCP that they shall be relocated and be given a lot of 200 square meters each with a house of 36 square meters floor area, which shall be titled in their names, and furthermore, they will be given employment priority once the project materialized;

4.            The subject property is included in the CALABAR Special Development Project under the Philippine Assistance Program which is included in the 1989 Investment Priority Plans of the Government.

You now request opinion on the tax treatment of the homelots and houses given by SPPI to the tenants-beneficiaries. Likewise, SPPI in its letter to this Office, is requesting that, in the event a favorable ruling is made in its favor to the above donations, taxes which had been paid therefor be incorporated as part of their future tax credits instead of tax refund.

In reply, please be informed that pursuant to Section 66 of R.A 6657, otherwise known as the “Comprehensive Agrarian Reform Law of 1988″, transactions involving a transfer of ownership, like in the instant case, shall be exempted from the payment of registration fees, and other taxes for the conveyance or transfer thereof.

Applying the foregoing provision, the donation of homelots to the tenant-beneficiaries of the comprehensive agrarian reform program are therefore exempt from all taxes and fees being imposed in connection therewith. liblex

It is noted that the sale between the landowner, i.e., Benita P. Navarro and ICCP Group through Science Park of the Philippines, Inc., the latter having acquired the land pursuant to Section 65 of the same law, and application for such conversion of land use from agricultural to industrial having initially made by them, was in accordance with Administrative Order No. 1, S. 1990. The conversion which resulted in the constructive displacement of farmers-beneficiaries shall entitle the displaced beneficiaries to a disturbance compensation and the assurance of homelots and eventual employment to be provided by the applicant/developer. The grant of these privileges to the displaced farmers-beneficiaries is a measure designed to serve as a cushion on the adverse effect of the land conversion. These privileges have, likewise, been clearly set forth as among the conditions in the petition for conversion of land use, which had been voted favorably in a referendum held by the farm workers among themselves.

The Comprehensive Agrarian Reform Program (CARP) has the very purpose of lifting up the economic status of the beneficiaries and promote social justice and to move the nation towards sound rural development and industrialization. Anent to this, the State shall, likewise provide incentives to landowners to invest the proceeds of the agrarian reform program to promote industrialization, employment and privatization of public sector enterprises. On the other hand, the feasibility of acquiring the distributable portion of the land under the program has secured the rights of the agricultural workers/beneficiaries. But while being so, the subsequent conversion of the land use from agricultural to industrial had ultimately displaced the aforesaid beneficiaries.

Thus, the State, in its effort to promote rural industrialization, had authorized land use conversion under Section 65 of R.A. 6657. The favorable vote by the affected beneficiaries and the approval of conversion of land use had effectively exempted the land from the coverage of the CARP.

Such being the case, the subsequent donation of homelots, including the building of replacement houses at the relocation site, to the displaced beneficiaries and which was made to comply with the relocation of the displaced workers as required by Administrative Order No. 1 S. 1990, is exempt from donor’s tax, since, the same are deemed to be within the coverage of the comprehensive agrarian reform process. On the other hand, entitlement to disturbance compensation does not pertain to the transactions involving the transfer of ownership, but to the income/produce which were ultimately lost and has no possibility of being earned or harvested, as a result of the conversion, thus, it is subject to income tax.

Accordingly, pursuant to Section 66 of R.A. 6657, in relation to Section 65 of the Act, donations of homelots, including replacement houses built on the relocated site, made by Science Park of the Philippine, Inc. in favor of the tenants/farm workers are exempt from donor’s tax imposed under Section 91 of the Tax code, as amended (now Section 98 of the Tax Code of 1997). cdlex

In connection with the request of SPPI for incorporation of any tax refund it may have as a result of this ruling to whatever future tax credits the corporation may have, please advise them to forward their claim to the Appellate Division for the issuance of a Tax Credit Certificate in their favor.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void.

Very truly yours,

(SGD.) LIWAYWAY VINZONS-CHATO

Commissioner of Internal Revenue

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BIR Ruling No. 095-98 (June 19, 1998)

77 & 81(b)-000-00-095-98

Mr. Tony Briones

8-E Brooklyn Street

Cubao, Quezon City

S i r :

This refers to your letter dated April 12, 1997 requesting, on behalf of the heirs of the late Paciencia M. Sto Domingo, for a ruling as to the taxability, bases of valuation and penalties, if any, of the estate of the deceased Paciencia M. Sto. Domingo consisting of the following properties:

1.            A parcel of residential land, including improvements thereon, containing an area of 601.9 square meters covered by TCT No. 170929 and Tax Declaration Nos. 2-139 and 2-139-A (1979); and   cdasia

2.            A parcel of residential land containing an area of 617.6 square meters covered by TCT No. 170930 and Tax Declaration No. 2-140 (1979).

It is represented that the late Paciencia M. Sto. Domingo died intestate on May 19, 1978; that the above-mentioned properties are adjacent to each other and situated at 88 Kapiligan St., Araneta Subd., Brgy. Imelda, Quezon City; that the current zonal value of the said properties is P7,500.00 per square meter; and that the approved market value of the aforesaid properties per Tax Declaration are as follows:

Kind            TCT No.            Tax Decl. No.            Market Value

Land            170929            2-139            P132,420

Land            170930            2-140            135,870

Improvement            2-139-A            124,220

with remarks that the same are sunken and flooded; and that because the heirs are all living in different places and it is only now that they have the chance to settle the estate, they are now voluntarily filing the return and pay the corresponding estate tax due.

In reply, please be informed that “Estate Tax” has been defined as the tax levied on the transmission of the properties of the decedent at death and is based on the value of the net estate regardless of the number of heirs or their relationship to the decedent. Under then Section 99 of the Tax Code (now Section 88 of the Tax Code of 1997), there shall be levied, assessed, collected and paid upon the transfer of the net estate as determined in accordance with then Sections 100 and 101 of the same Code (now Sections 86 of the Tax Code of 1997), of every decedent, whether resident or non-resident of the Philippines, a tax based on the value of such net estate, as computed in accordance with the schedule found in said then Section 99.  cda

In this connection, under then Section 103 of the Tax Code (now Sec. 88 of the Tax Code of 1997), the estate shall be appraised at its fair market value as of the time of death, or as of six (6) months thereafter, at the election of the executor or administrator. However, the appraised value of real property as of the time of death, or at the election of the executor or administrator, as of six (6) months after death shall either be (a) the current and fair market value as shown in the schedule of values fixed by the Provincial and City Assessor or (b) the fair market value as determined by the Commissioner of Internal Revenue, whichever is higher, and shall be binding upon all concerned for purposes of computing any internal revenue tax based on the value of the property.

From the foregoing, the estate of the late Paciencia M. Sto. Domingo is liable to pay the estate tax imposed under then Section 99 of the Tax Code, the law then enforced at the time of her death on May 19, 1978, based on the fair market value at the time of the death of the decedent as determined by the City Assessor (and not on the zonal valuation since the tentative valuation of real properties as determined by the Commissioner started only in 1986 under RAMO No. 1-86) of the above-mentioned realties comprising the net estate of the decedent which is arrived at in accordance with the following formula:

Gross Estate (then Sec. 100)            xxx

Less: Statutory Deductions

(then Sec. 101)            xxx

            ——

Gross Conjugal Estate            xxx

Less: Share of the Surviving Spouse

(Sec. 101(c)            xxx

            ––––

Net Estate            xxx

            ====

Furthermore, under then Section 104 of the same Code (now Sec. 89 of the Tax Code of 1997), in all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds three thousand pesos (P3,000.00), the executor, administrator, or any of the legal heirs, as the case may be, within two months after the decedent’s death, or within a like period after qualifying as executor or administrator, shall give a written notice to the Commissioner of Internal Revenue.   cdlex

Likewise, under then Section 105(b) of the same Code [now Sec. 90(B) of the Tax Code of 1997], the return required under Section 105(a) [now Sec. 90(A) of the Tax Code of 1997] shall be filed within six (6) months after the decedent’s death; but if judicial testamentary or intestate proceedings shall be instituted for the settlement of the decedent estate prior to the expiration of said period, the same must be filed within twelve (12) months after the decedent’s death.

Finally, pursuant to then Section 107(a)(1) and (2) of the Tax Code, the estate tax imposed under then Section 99 of the same Code shall be due and payable within nine (9) months after the decedent’s death and shall be paid by the executor, administrator, or the heirs to the Commissioner of Internal Revenue or to the Regional Director, Revenue District Officer or Collection Agent of the city or municipality where the decedent was domiciled at the time of death. In case judicial testamentary or intestate proceedings shall be instituted for the settlement of the decedent’s estate prior to the expiration of six months after his death, the estate tax shall be due and payable within twenty-one (21) months after the decedent’s death. [Sec. 91 of the Tax Code of 1997]

In this connection, then Section 113(a)(1) provides that where the amount of the tax imposed is not paid on the due date, there shall be collected as part of the tax, interest upon such unpaid amount at the rate of fourteen per centum (14%) per annum, from the due date until it is paid, but in no case shall it exceed the amount corresponding to a period of three years. Furthermore, pursuant to then Section 119(a) of the same Code, in addition to the aforesaid delinquency interest, for failure to pay the tax, make such return or supply such information, there shall also be imposed a penalty of not more than Two Thousand Pesos (P2,000.00) or imprisonment for not more than six months, or both. [Sections 113(a)(1) and 119(a) of the Tax Code of 1977 have been repealed by P.D. No. 1994 dated November 5, 1985].

However, since the heirs of the late Paciencia M. Sto. Domingo are now voluntarily paying the estate tax without notice and demand from the Commissioner of Internal Revenue and that the delay is for a justifiable reason, no ad valorem penalties prescribed under then Section 114 of the Tax Code shall be imposed for failure to make and file the return required to be filed therefor.   prcd

Accordingly, the estate of the late Paciencia M. Sto. Domingo is liable to pay the estate tax due plus penalties consisting of delinquency interest in the maximum rate of forty two percent (42%) computed at 14% per annum for three years and a compromise penalty in the amount of Two Thousand Pesos (P2,000.00) in lieu of the criminal liability resulting from failure to pay the tax, make the return or supply such information. You are, therefore, advised to pay this amount within ten (10) days from your receipt of this letter.

Very truly yours,

(SGD.) LIWAYWAY VINZONS-CHATO

Commissioner of Internal Revenue

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BIR Ruling No. 086-95 (June 13, 1995)

78 000-00 086-95

ATTY. JULIO H. OZAMIZ

2/F Philamlife Building

1411 Benavidez St., Legaspi Vill.

Makati, Metro Manila

S i r :

This refers to your letter dated January 4, 1995 stating that in April 1991, Mario J. Mendezona entered into a Trust Agreement with Far East Bank and Trust Co. at Manila involving an amount of P5,108,132.67 which under the Trust Agreement would be transferred and given to the heirs of Carmen F. Ozamiz upon her death; and that on July 12, 1994, Carmen F. Ozamiz died after a lingering illness. cdta

Based on the foregoing representations, you are now requesting for a ruling on the following queries:

“1.            Is this money subject to Estate tax considering that from the document itself it shows that the money belonged to Mario J. Mendezona given in trust to the heirs of Carmen Ozamiz, with the death of Carmen Ozamiz as the condition for its transfer to the heirs?

“2.            If said money placed in trust is indeed subject to Estate Tax, who is liable for payment of said tax on the amount — Mario J. Mendezona who, on the face of the document appears to have owned said money, or the Estate or Heirs of Carmen Ozamiz?”

In reply, please be informed that your abovequoted queries are answered as follows:

1.            Your first query is answered in the negative. Under Section 78 of the Tax Code, as amended, the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated. Accordingly, and — Mario J. Mendezona is not the decedent and the money subject of the Trust Agreement between Mario J. Mendezona and Far East Bank and Trust Co. belongs to him with the condition that the said money will be transferred to the heirs of Carmen Ozamiz (the decedent) upon the death of the latter, the same is not part of the gross estate of the decedent; hence, not subject to the estate tax imposed under Section 77 of the Tax Code, as amended. However, Mario J. Mendezona is subject to the donor’s tax imposed under Section 92(b) of the Tax Code, as amended, on the transfer of the money he placed in trust to the said heirs upon the death of Carmen Ozamiz.

2.            Your second query is no longer relevant in view of the answer in your first query. casia

Very truly yours,

LIWAYWAY VINZONS-CHATO

Commissioner of Internal Revenue

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BIR Ruling No. 085-82 (March 22, 1982)

34-h 000-00 085-82

Atty. Angel L. Santos

203 Aristocrat Apts.

2020 A. Mabini Street

Malate, Metro Manila

S i r :

This refers to your letter dated April 4, 1981, requesting for the issuance of a certificate of exemption from the payment of capital gains tax on the transfer of the title, right and interest over a parcel of land covered by Transfer Certificate of Title No. 459319 from the Trustee, Jose Bernabe, Jr., in favor of the Donee-Beneficiary, Vicente Patricio Gomez, pursuant to the provisions of the Deed of Transfer of Trust dated March 4, 1981.

It appears from the documents submitted that subject parcel of land with improvements previously covered by TCT No. 446480 was donated to Vicente Patricio Gomez pursuant to a Deed of Donation with Trust executed on July 25, 1974 by Engracia C. Reyes; that it was registered in the name of the Trustee Jose Bernabe, Jr. for and in behalf of the Donee-Beneficiary on October 1, 1974 after the donor’s tax has been paid on August 26, 1974; that the Donee-Beneficiary has attained the age of 25 years; and that the transfer of the property from the trustee to the Donee-Beneficiary was effected so as to comply with the provisions of the said Deed of Donation with Trust to the effect that, after the Donee-Beneficiary has reached the said age, the trust created shall automatically be terminated and title to its property subject of the trust shall pass to and vest in the Donee-Beneficiary. cdtech

In reply, please be informed that inasmuch as the “Deed of Transfer of Trust” actually involved the termination of the Trust when the Donee-Beneficiary attained the age of twenty-five (25), no capital gains was realized nor loss incurred on the subsequent transfer of the title to the property from the Trustee to the Donee-Beneficiary. Accordingly, no capital gains tax, as imposed under Section 34(h) of the Tax Code, as amended by Batas Pambansa No. 37, is due from the Trustee under these particular circumstances.

Very truly yours,

RUBEN B. ANCHETA

Acting Commissioner

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BIR Ruling No. 081-98 (May 28, 1998)

78-000-00-081-98

Atty. Amalia Yvonne Cariño

508 Katarungan Street

Mandaluyong City

M a d a m :

This refers to your letter dated July 22, 1996 requesting for exemption from the payment of gift tax under Section 91 of the Tax Code, as amended, (now Section 98 of the Tax Code of 1997) for the donation mortis causa you executed in favor of your sister, Marijo B. Cariño.   cdrep

The Deed of Donation Mortis Causa made and executed by and between you, as the Donor, and Marijo B. Cariño, as the Donee, provides that for and in consideration of the love and affection and because of the uncertainty of life and the inevitableness of death and the desire to give something to the latter, you thereby give, transfer and convey, by way of donation to said Donee, your property covered by Transfer Certificate of Title No. 8610 and the one-third (1/3) undivided share in the property covered by Transfer Certificate of Title No. 8613, including improvements thereon; that the same is subject to the following conditions, viz:

“1.            That this donation shall produce effects only by and because of the death of the Donor, the properties herein donated to pass title after the Donor’s death.”

“2.            That the Donor reserves the right to amend or cancel this donation at any time during her lifetime.”

and that the Donee received and accepted the gift and donation made in her favor subject to the above-cited conditions, and thereby expressing her appreciation and gratefulness for your kindness and generosity.

In reply, please be informed that pursuant to Section 78 of the Tax Code, as amended (now Section 85 of the Tax Code of 1997), viz, all property, real or personal, . . . (b) to the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, . . . or (c) to the extent of any interest therein, of which the decedent has at any time made transfer (except in case of bona fide sale . . .) by trust or otherwise, where the enjoyment thereof was subject at the date of  his death to any change through the exercise of power by the decedent alone . . . to alter, amend, revoke or terminate, or where any such power is relinquished in contemplation of the decedent’s death . . .”, are included in determining the value of the gross estate of the decedent. (Emphasis supplied.)

Parallel to the above provision is Article 728 of the New Civil Code stating that donations which are to take effect upon the death of the donor partake of the nature of testamentary provisions.   LexLib

Accordingly, the donations/gifts made by you in favor of your sister, Marijo B. Cariño, which are “intended to take effect upon the death of the donor” partake of the nature of testamentary provisions and the same shall remain part of the donor decedent’s gross estate at the time of his/her death even if the same have been donated in favor of the donee. Therefore, the aforestated provisions relative to the imposition of estate tax on transfers in contemplation of death shall apply in this case.

Such being the case, the instant donation/gifts are exempt from the donor’s (gift) tax imposed under Section 91 of the Tax Code, as amended, (Section 98 of the Tax Code of 1997) hence, your request for exemption is hereby granted.

It is however, emphasized that since a donation mortis causa takes effect only upon the death of the donor, the real properties subject of the donation cannot be transferred in the name of the donee and shall thereby remain the properties of the donor during his/her lifetime. Meanwhile, the said “Donation Mortis Causa” can be properly annotated at the back of the Transfer Certificates of Title (TCT) by the concerned Register of Deeds in order not to prejudice the right of any person that may be affected by the said donation, including that of both the Donor and the Donee.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void.   Cdpr

Very truly yours,

(SGD.) LIWAYWAY VINZONS-CHATO

Commissioner of Internal Revenue

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BIR Ruling No. 076-89 (April 17, 1989)

28 000-00 076-89

Gentlemen:

This refers to your letter dated February 24, 1989 stating that General Motors Pilipinas, Inc. (GMPI) is a domestic corporation organized under the laws of the Philippines; that it is a joint venture corporation owned 60% by General Motors Overseas Distribution Corporation (GM-US) and 40% by Isuzu Motors Limited of Japan (ISUZU); that GMPI was engaged in the manufacture of transmissions and components as well as in the assembly of cars and trucks (largely Isuzu) under the former PCMP and PTMP programs of government; that in September 1985, due to economic recession in the Philippines and the depressed automotive market, plus the non-availability of foreign exchange for the importation of parts for car and truck assemblies, GMPI ceased its manufacturing and assembly operations; that at the time operations were terminated, GMPI was insolvent and has since remained insolvent; that in meetings held in December 1985, the shareholders and the Board of Directors of GMPI recommended the dissolution of GMPI; that in order to facilitate the liquidation and dissolution of the company, on September 30, 1986, the stockholders approved a resolution to shorten GMPI’s corporate life to October 15, 1986; that pursuant to said resolution, GMPI filed with the Securities and Exchange Commission, an application to amend its Articles of Incorporation to shorten GMPI’s corporate life; that a liquidating trustee was designated to dispose the remaining assets, satisfy the obligations and wind up the affairs of the company; that based on the December 31, 1988 unaudited financial statements of GMPI, it has outstanding liabilities/indebtedness to banks and affiliates in the following amounts: cdasia

Bank Debt

Non-Trade Related             Principal            P280,150

            Interest            54,522

Trade Related             Principal            246,942

            Interest            48,093

Due to Affiliated Companies

Isuzu Motors Limited            P113,240

General Motors Corp. (GMC)            19,334            132,574

             ————            ————

TOTAL                        P762,281

                        =======

that the total outstanding liabilities to banks and GMC plus accrued interest amount to P649,041,000; that the 1987 unaudited financial statements, as submitted with GMPI’s 1987 income tax return, show that as of December 31, 1987 GMPI had a capital deficiency of P664,522,000; that based on the December 31, 1988 unaudited financial statements, the capital deficiency is P739,057,000; that pursuant to liquidation accounting principles, the value of the property, plant and equipment was adjusted to P20,450,000; that since GM-US, has no further interest to continue its ownership in the inactive corporate shell of GMPI, GM-US, will assign its 60% shareholdings in GMPI to Isuzu; that in connection with the proposed acquisition of the GMPI shares from GM-US it was agreed that GMPI would “clean-up” the liabilities shown in the financial statements and that it would have no major current outstanding liabilities except the liability to Isuzu; that it is proposed that this would be accomplished when the shares are transferred in three steps, as follows: (1) By having GMPI’s creditor banks waive accrued interest totalling P102,615,000 on the non-trade and trade related debt; (2) By having these banks assign to GM-US, its GMPI non-trade related receivables totalling P280,150,000. At that time GM-US will condone the total GMPI indebtedness due to it amounting to P299,484,000 including the aforementioned non-trade debt as well as other non-trade liabilities due GMC totalling P19,334,999; (3) By having the banks grant a participation to GM-US in GMPI trade related receivables totalling P246,942,000 GM-US would then assign these receivables to Isuzu. As approved by the Central Bank of the Philippines and the SEC, Isuzu would accept pesos from GMPI in repayment of the trade debt and simultaneously reinvest the pesos in GMPI as paid-in surplus; that subsequent to the three-step transaction outlined above, and after GM-US assignment of GMPI shares to Isuzu, the latter as the new 100% parent company may consider infusing additional capital to restore the business into a viable operation and eliminate the capital deficiency; that inasmuch as the business operations of the company will be revived in the future by Isuzu, the company will resume its “going concern” status following the transfer of share by GM-US; and that as a going concern, its assets previously adjusted to liquidation values shall be restored to its valuation prior to liquidation of P19,579,000 including depreciation and amortization up to December 31, 1988.

In connection therewith, you now request confirmation of your opinion to the effect that the bank’s waiver of accrued interest on the non-trade and trade related indebtedness of GMPI and GM-US condonation or forgiveness of GMPI’s non-trade related indebtedness are not subject to income tax nor to gift tax.

In reply, thereto, I have the honor to inform you that your opinion is hereby confirmed. Cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If for example, an individual performs services for a creditor who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter’s gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend. (Sec. 50 Revenue Regulations No. 2) The waiver of interest by the banks on non-trade and trade related indebtedness of GMPI is not subject to income tax considering that the deduction of said interest as expense in prior years did not offset nor reduce the taxable income of GMPI since it was in a financial loss position even without the deduction. (See Barnhart-Marrow Consolidated v. Commissioner of Internal Revenue, 47 BTA 590) Moreover, when a creditor cancels a debt as part of a business transaction, the debtor is enriched or its net assets has been increased and, therefore, he realized taxable income (Philippine Fiber Processing Co. v. CIR, CTA Case No. 1407 Dec. 29, 1966). However, a transaction whereby nothing of exchangeable value comes to or is received by a taxpayer does not give rise to or create taxable income. (See Dallas Transfer and Terminal Warehouse Co. v. Commissioner of Internal Revenue 5 Cir. 70 F 2d 95, 13AFTR 930) Accordingly, the condonation of GMPI’s indebtedness by GM-US is not subject to income tax since before and after the condonation GMPI remains insolvent, i.e., in a capital deficiency position. The condonation is likewise not subject to gift tax since there is no donative interest on the part of GM-US but solely for business consideration since Isuzu will only acquire the GMPI shares from GM-US if GMPI has a “clean” balance sheet with no outstanding liabilities except those to Isuzu.

Moreover, a return to solvency due to a possible future additional capital infusion by Isuzu and/or subsequent profitability in a different taxable year will not affect the non-taxability of the condonation. cdta

Very truly yours,

(SGD.) JOSE U. ONG

Commissioner

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BIR Ruling No. 067-98 (May 21, 1998)

R.A. 6657 (Sec. 66) 000-00 067-98

Ms. Gloria Solomon

Brgy. Amagbagan, Pozorrubio

Pangasinan

M a d a m :

This refers to your letter dated October 21, 1996 requesting, on behalf of Graciano and Maximino Solomon, for tax exemption of agricultural lots redeemed by them pursuant to the Department of Agrarian Reform Adjudication Board (DARAB) Decision promulgated on January 11, 1995.   cda

Facts of the case as stated in the DARAB’s Decision are as follows:

Graciano Solomon and Maximino Solomon filed the complaint for redemption on January 23, 1989 alleging that the original case for redemption, was first filed on June 3, 1982 with the then Court of Industrial Relations against defendants Leonor Jovellanos and Elvira Sales as represented by Esperanza Natnat; that a counterclaim was filed on June 12, 1982 by the said defendants; that the said counterclaim was answered on July 16, 1982, where the amount of Forty Thousand Pesos (P40,000.00) was deposited as redemption price with the Clerk of Court only on January 16, 1984; that the aforesaid case was subsequently dismissed on October 11, 1988 by the Regional Trial Court, Branch 47, Urdaneta for lack of jurisdiction; that further motion for reconsideration was denied by the Court; that in view of the effectivity of Republic Act No. 6657 on June 15, 1988, the case was re-filed with the Department of Agrarian Reform Adjudication Board on the basis of the rights conferred by Section 12 of Republic Act No. 3844, as amended by said R.A. No. 6657; that in their complaint, plaintiffs-appellees alleged that they are agricultural lessees in the portion of a parcel of land owned by defendant Leonor Jovellanos and possessed by defendant Elvira Sales, represented by Esperanza Natnat; that Graciano Solomon’s farmholding is situated in Amagbagan, Pozorrubio, Pangasinan with an area of Eighteen Thousand Five Hundred Nine (18,509) square meters, more or less; that said land was the subject of a leasehold contract with Administratrix Natnat; that Maximino Solomon’s farmholding is also situated in Amagbagan with a total area of Five Thousand Five Hundred Fifty Eight (5,558) square meters, more or less; and also covered by a leasehold contract with said Administratrix; that on October 8, 1981, a Deed of Sale with pacto de retro was executed over a parcel of land by landowner Leonor Jovellanos in favor of Elvira Sales in the amount of Ten Thousand Pesos (P10,000.00) consisting of Thirty Six Thousand Five Hundred Eighty Eight (36,588) square meters, more or less, and covered by Original Certificate of Title No. 19966; that on March 25, 1982, portion of said property consisting of Twenty Five Thousand (25,000) square meters, more or less, was the subject of an Absolute Deed of Sale between Leonor Jovellanos and Elvira Sales, the latter represented by Esperanza Natnat, for a consideration of Forty Thousand Pesos (P40,000.00); that the subject portion is the land area under leasehold by the plaintiffs-appellees; that fact antecedent to the said sale was proven that Jovellanos, in her letter to the Administratrix Natnat, directed the latter to sell the portion of the leased property to lessee Graciano Solomon, who was then willing to buy the property at a higher price but Natnat withheld this information and instead clandestinely sold the same to Elvira Sales; that the execution of the aforesaid deed was without the knowledge and consent of the plaintiffs nor were they informed of the sale; and that documents, i.e., Transfer Certificate of Title and Tax Declarations submitted to this Office revealed that the aforesaid sale between landowner Jovellanos and transferee Sales was not annotated in the TCT, nor was there any change of tax declarant pertaining to the sold portion.

In reply, please be informed that pursuant to paragraph 2, Section 31 of Republic Act No. 3844, otherwise known as “An Act to Ordain the Agricultural Land Reform Code and to Institute Land Reforms in the Philippines, including the Abolition of Tenancy and the Channelling of Capital into Industry, Provide for the Necessary Implementing Agencies, Appropriate Funds Therefor and For Other Purposes”, as amended by R.A. No. 6657 (Comprehensive Agrarian Reform Law), which reads, viz:

Sec. 31.            Prohibitions to the Agricultural Lessors. — It shall be unlawful for the agricultural lessors:   cdlex

xxx                    xxx                    xxx

(2)            To require the agricultural lessee to assume, directly or indirectly, the payment of the taxes or part thereof levied by the government on the landholding:

xxx                    xxx                    xxx”

Conversely, an agricultural lessee does not assume, whether directly or indirectly, the payment of any taxes or part thereof levied by the government.

It is noted that at the time of the effectivity of R.A. No. 6657 (CARL), the leasehold contract between landowner Leonor Jovellanos and Graciano Solomon and Maximino Solomon continued to exist. There had never been a change in the parties in so far as the Register of Deeds of Pangasinan and Department of Agrarian Reform are concerned as the sale between the Jovellanos and Sales or the subsequent leasehold contract between them were not annotated in the TCT. The necessity of registering the aforesaid contracts for the purpose of validity, in relation to Article 1409 (7) of the Civil Code of the Philippines, was strengthened by the existing proviso of Section 6 of R.A. No. 6657, viz,

“Sec. 6.            Retention Limits. —

xxx                    xxx                    xxx

Upon the effectivity of this Act, any sale, disposition, lease, management contract or transfer of possession of private lands executed by the original landowner in violation of this Act shall be null and void: Provided, however, That those executed prior to this Act shall be valid only when registered with the Register of Deeds within a period of three (3) months after the effectivity of this Act. . . .” (Emphasis supplied.)

The aforequoted provision conclusively presumes that contracts entered into must first comply with the retention limits required by law, and that it further requires that the same must be registered with the Register of Deeds to be valid.

True enough, the DARAB had based its decision on Section 12 of R.A. No. 3844, the law then effective at the time of the supposed sale between landowner Jovellanos and Elvira Sales, which partially reads as follows:

“Sec. 12            Lessee’s Right of Redemption. — In case the landholding is sold to a third person without the knowledge of the agricultural lessee, the latter shall have the right to redeem the same at a reasonable price and consideration: . . .”

The DARAB, applying the aforequoted provision had ruled in favor of lessees Graciano Solomon and Maximino Solomon, and further stated that the right to redeem had not yet prescribed on the ground of technicalities, i.e., lack of notice of sale to the lessees and to the DAR when they opted to exercise their right. While the exercise by the lessees of their right to redeem was based on the said provision of R.A. 3844, obviously it had taken place only at the time when R.A. No. 6657 is already effective. The latter Act which is an amendatory comprehensive agrarian reform act, effectively made the transaction fall within its coverage.   cdll

And since Section 6 of the same Act provides that the sale transaction between landowner Jovellanos and Elvira Sales not having been registered with the Register of Deeds is void, the transfer of ownership, which will actually take place under the present agrarian program, shall be governed by the provisions of the CARL, the existing agrarian legislation not inconsistent with it and merely suppletory pursuant to Section 75 of the same Act. Thus the transaction, i.e., land acquisition by an agricultural lessee through the exercise of his right of redemption under Section 12 of R.A. 3844, falling within the coverage of agrarian land reform process, shall likewise be within the scope of Section 66 of R.A. No. 6657, which states:

“SEC. 66.            Exemptions from Taxes and Fees of land Transfers. — Transactions under this Act involving a transfer of ownership, whether from natural or juridical persons, shall be exempted from taxes arising from capital gains. These transactions shall also be exempted from the payment of registration fees, and all other taxes and fees for the conveyance or transfer thereof; Provided, That all arrearages in real property taxes, without penalty and interest, shall be deductible from the compensation to which the owner may be entitled.”

In view of the foregoing, this Office is of the opinion as it hereby holds that the execution of a Deed of Absolute Sale over a portion of an agricultural land falling under the coverage of the agrarian reform program by vendee Elvira Sales in favor of agricultural lessees-redemptioneers, Graciano Solomon and Maximino Solomon in pursuance to the DARAB’s decision upholding the latters’ right to redeem under R.A. 3844, is exempt from capital gains tax and other taxes under Section 66 of R.A. 6657 since the transfer was made during the effectivity of the aforesaid CARL.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different from the aforestated representations, this ruling shall be automatically considered null and void.   cda

Very truly yours,

(SGD.) LIWAYWAY VINZONS-CHATO

Commissioner of Internal Revenue

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BIR Ruling No. 066-98 (May 21, 1998)

000-00-066-98

Mr. Emelino T. Maestro

2120 Sma. Trinidad

Balik-balik

Sampaloc, Manila

S i r :

This refers to your letter dated April 2, 1998 requesting in behalf of the heirs of the late Ponciano L. Almeda for: (a) an extension of thirty (30) days within which to file the estate tax returns; (2) an extension of two (2) years within which to pay the corresponding estate tax due on the transmission of the said estate to the heirs pursuant to then Section 84(b) of the Tax Code of 1977 [now Section 91(B) of the Tax Code of 1997]; and (c) the waiver and non-payment of the 25% surcharge should the first two requests be allowed.

It is represented that the late Ponciano L. Almeda died on October 16, 1997; that under then Section 83(b) of the Tax Code of 1977 [now Section 90(B) of the Tax Code of 1997], the estate tax returns of the estate of the late Ponciano L. Almeda was due for filing last April 15, 1998; that the tax due on the estate is P222,504,432.00; that the sudden demise of the decedent has left the heirs in disarray, particularly with regard to the conduct of the business; that the decedent had a centralized style of management and nobody was privy to his business affairs; that the situation was further exacerbated by the fiery destruction of Almeda Building I, resulting in the loss of all records; that the income statement bears the fact that the business operates at a net loss; that the present business environment does not augur well for property rentals, which is the main line of their business; and that the heirs are constrained to make this request for they cannot possibly meet the deadline for the reasons that they cannot afford to separately and individually contribute to the settlement of the estate tax.   LLphil

In reply, please be informed as follows:

(a)            For the purpose of determining the estate tax provided for in then Section 77 of the Tax Code of 1977 [now Section 84 of the Tax Code of 1997], the estate tax return shall be filed within six (6) months from the decedent’s death. (Section 83(b) of the Tax Code of 1977)[now Section 90(B) of the Tax Code of 1997] Moreover, the Commissioner of Internal Revenue shall have the authority to grant, in meritorious cases, a reasonable extension not exceeding thirty days for filing the return. (Section 83(c) of the Tax Code of 1977)[now Section 90(C) of the Tax Code of 1997] Accordingly, in view of the aforesaid justifiable reasons, your request for an extension of thirty (30) days from April 15, 1998 to May 15, 1998 within which to file the estate tax return is hereby granted.

(b)            The estate tax imposed by then Section 77 of the Tax Code of 1977 [now Section 84 of the Tax Code of 1997] shall be paid at the time the return is filed by the executor, administrator, or the heirs. (Sec. 84(a) of the Tax Code of 1977)[now Sec. 91(A) of the Tax Code of 1997] Moreover, when the Commissioner of Internal Revenue finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed five years, in case the estate is settled through the courts, or two years in case the estate is settled extra-judicially. In such case, the amount in respect of which the extension is granted shall be paid on or before the date of the expiration of the period of the extension, and the running of the statute of limitation for assessment as provided in then Section 203 of the Tax Code of 1977 [also Section 203 of the Tax Code of 1997] shall be suspended for the period of any such extension. (Section 84(b) of the Tax Code of 1977)[now Section 91(B) of the Tax Code of 1997]

Such being the case, and since the payment of estate tax or any part thereof in the amount of P222,505,432.00 on the due date would impose undue hardship upon the estate or any of the heirs, your request for an extension of the time for the payment of the estate tax or any part thereof due on the transmission of the estates of the late Ponciano L. Almeda to his heirs is hereby granted.   dctai

(c)            Considering that the aforementioned first two requests have been granted, your request for a waiver or non-payment of the 25% surcharge on the estate tax due on the transmission of the late Ponciano L. Almeda’s estate is likewise granted. However, it shall be understood that the said estate shall be liable to the corresponding interest that have accrued thereon up to the time of filing of the return and payment of the estate tax due on the transmission of the said estate to the heirs.

Very truly yours,

(SGD.) LIWAYWAY VINZONS-CHATO

Commissioner of Internal Revenue

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