November 13, 2003

BIR RULING [DA-412-03]

24 (D) (1); 196 #121-88;118-96;
169-98
Rilloraza, Africa, De Ocampo & Africa
Law Offices
7th and 10th Floors, Telecoms Plaza
316 Sen. Gil Puyat Avenue
Makati City
Attention: Atty. Cesar G. David
Counsel
Gentlemen :
This refers to your letter dated November 22, 2002 stating that Lacson
Hermanos Agro-Industrial Corporation ("LHAIC") is a corporation which owns four
parcels of land covered by TCT Nos. 6706, 6707, 6708 and 6709; that TCT No. 6706
was later subdivided into four parcels and titled as TCT Nos. 9070, 9071, 9072 and
9073; that TCT 9070 was further subdivided into three (3) parcels titled as TCT Nos.
9327, 9329, and 9330; that TCT No. 9071 was further subdivided into six (6) parcels
and titled as TCT Nos. 9323, 9324, 9325, 9326, 9328, and 9331; that TCT No. 9072
was further subdivided into three (3) parcels and titled as TCT Nos. 9332, 9333, and
9334; that all of the above parcels of land were mortgaged to Republic Planters Bank
to secure the payment of the obligation of the corporation in the amount of
P13,366,194.58; that on November 6, 1990, the Bank assigned all its credit rights,
with the securities, to one Manuel Sanchez who paid a discounted amount of
P7,562,554.36; that on November 26, 1990, Manuel Sanchez cancelled the mortgage
over TCT Nos. 9326, 9330 and 9334 upon payment to him of the sum of
P2,000,000.00; and that on the same day, he cancelled the mortgage over TCT Nos.
6707, 6709, 9323, 9327, 9328, 9329, and 9331 upon payment to him of the sum of
P3,000,000.00.
Copyright 2015

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia 2014

In view thereof, you now ask for a ruling on whether Manuel Sanchez, as
assignee, is liable for any tax on the cancellation of mortgage over the above-titled
properties upon payment to him of P2,000,000.00 and P3,000,000.00 made by
LHAIC.
In reply, please be informed that the assignment of rights and credit over the
foreclosed properties of Republic Planters Bank as the mortgagee-bank in favor of
Manuel Sanchez is not subject to the capital gains tax imposed under Section
27(D)(5) of the Tax Code of 1997, since in this case, Manuel Sanchez, as the
assignee, in effect became the creditor of LHAIC, thereby merely steps into the shoes
of Republic Planters Bank as the one having the right as creditor-mortgagee to
exercise the right to foreclose the aforesaid mortgaged properties under Act 3135, as
amended by Act 4118, aside from the fact that there is no transfer of title to the real
properties involved in the said deed of assignment of right to foreclose the mortgaged
properties. Thus, the mortgagee bank, in assigning its credit and mortgage rights in
favor of Manuel Sanchez for and in consideration of P7,562,554.36 was merely
assigning whatever rights it had in said foreclosed real properties and the assignee
does not acquire a better right than what the assignor-bank had in the properties to
which the rights assigned pertains. (BIR Ruling No. DA-252-96 dated July 18, 1996)
Moreover, the cancellation of mortgage on the eight (8) properties, executed by
Manuel Sanchez in favor of LHAIC in consideration of the sum of P2,000,000.00 and
P3,000,000.00, is likewise not subject to capital gains tax, since LHAIC is merely
exercising its right of redemption under Act 3135 as amended by Act 4118 and no
consolidation of ownership over the foreclosed properties was made by neither
Republic Planters Bank nor Manuel Sanchez as the redemption was accordingly made
within the redemption period. (BIR Ruling No. 121-88 dated March 25, 1988 and BIR
Ruling No. DA-252-96 dated July 18, 1996)
cATDIH

Finally, under Article 415(10) of the Civil Code, "real rights over immovable
property" are themselves immovable or real property or realty. The Deed of
Assignment executed by Republic Planters Bank in favor of Manuel Sanchez is
tantamount to a conveyance of real property to the purchaser and should be subject to
documentary stamp tax under Section 196 of the Tax Code of 1997. In such case, the
assignment of right and credit over the subject properties already involves a
conveyance of a real right over the real properties subject of the mortgage. The herein
transaction, as represented, involves a conveyance of real right from the assignor-bank
(Republic Planters Bank) in favor of the purchaser-assignee, Mr. Manuel Sanchez.
(BIR Ruling No. 169-98 dated September 10, 1998)
Copyright 2015

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia 2014

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

Very truly yours

Commissioner of Internal Revenue

By:

(SGD.) JOSE MARIO C. BUAG

Deputy Commissioner
Legal and Inspection Group
Bureau of Internal Revenue

Copyright 2015

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia 2014