July 8, 1999

BIR RULING NO. 091-99

091-99

The Manila Banking Corporation

Manila Bank Building
6772 Ayala Avenue,
Makati City
Attention: Atty. Clarence D. Guerrero
Counsel

Gentlemen :
This refers to your letter dated June 18, 1999 which, in effect, seeks the confirmation by
this Office of your opinion on certain consequences arising from the Dacion en Pago con
Pacto de Retro agreement entered into by your client, The Manila Banking Corporation
(TMBC), calling for the "transfer" of certain bank properties in favor of the Central Bank
Board of Liquidators (CB-BOL). cdtai

It is represented that in May 1987, TMBC was place under receivership by the then Central
Bank of the Philippines (now Bangko Sentral ng Pilipinas); that as a result thereof, TMBC
was directed to cease and desist from engaging in any form of banking activity; that
attempts are now made to arrive at an acceptable Rehabilitation Plan for TMBC; that one
of the conditions for the approval of the proposed Rehabilitation Plan by the Monetary
Board is for TMBC to settle its obligation with CB-BOL in the amount of
PhP8,636,941,026.43, whereby the amount of PhP6,370,987,647.60 is to be paid in cash,
while the payment of the balance of PhP2,265,953,378.83 is to be guaranteed by bank
assets; that the latter arrangement shall be reflected in a Deed of Assignment with Right to
Repurchase (Dacion en Pago con Pacto de Retro) which instrument calls for the transfer
and conveyance by TMBC, as assignor, in favor of CB-BOL, as assignee, of certain parcels
of lands, to wit:
A. Silang (Cavite) Property (Foreclosed from Capitol City Farms, Inc.):
TCT No. Area (sq. m.)
T-128673 32,290

T-128674 252,354
T-128675 252,354

T-829169 34,542

T-829170 211,231
T-829171 6,582

B. Porac, Pampanga Property

TCT No. 308513-R 10,240,000 sq.m.

C. San Miguel, Bulacan Property (Foreclosed from Baguio Growers and

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 Producers, Inc.)
TCT No. Area
T-275531 78,008
T-285532 78,008

T-275553 1,560,267

T-275554 984,298
T-276442 1,009,420

D. San Miguel (Bulacan) Property (Foreclosed from Aseabrid Farms Corp.)

TCT No. Area
T-277927 1,680,064
T-277928 2,472,379

T-277929 459,358

T-277930 240,868

T-277931 1,575,235

T-277932 278,891

T-277933 66,067
T-277934 240,000

T-277935 868,738

E. San Miguel (Bulacan) Property (Foreclosed from Interfarms Livestock

Feeds, Inc.)
TCT No. Area
T-284752 289,044

T-284753 327,265

T-284754 173,382

T-284755 64,602
T-284756 309,727

T-284757 278,448

T-284758 1,023,678

T-284677 863,243

T-284678 11,792

T-284679 9,441

T-284680 446,191
T-277956 123,002
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 F. San Jose del Monte, Bulacan Property (Foreclosed from Gregorio Araneta,
Inc.)
TCT Area
T-203043 830,894
T-203045 903,914

G. San Jose del Monte, Bulacan Property (Foreclosed from Carmel Farms,
Inc.)
TCT Area
T-43.500(M) 68,545

T-44.782(M) 966,208

It is your further contention that although such assignment was denominated as Dacion en
Pago con Pacto de Retro, as evidenced by a copy of the agreement which you likewise
submitted to this Office, the same was in reality a Mortgage Agreement as the transfer
and conveyance is not absolute and unconditional but intended merely to secure the
payment of the balance of the loan obligation; that under Article 1602 of the New Civil
Code, a contract of sale with right of repurchase shall presumed to be an equitable
mortgage when (a) the price of the sale is inadequate, (b) the vendor remains in
possession of the property, (c) the vendee a retro retains part of the purchase price, and
(d) when it can be fairly inferred that the real intention of the parties is that the transaction
shall secure the payment of a debt or the performance of any other obligations.
In reply, we hereby confirm that the terms of the agreement between CB-BOL and TMBC
calling for the transfer of its assets, although denominated as Deed of Assignment with
Right to Repurchase, is in reality an equitable mortgage created over the said properties.
Instruments covering a sale with right to repurchase may be captioned or labelled as such.
However, when any one or more of the circumstances enumerated under Article 1602, Civil
Code, obtain in the agreement, the contract shall be presumed as an equitable mortgage.
(BIR Ruling No. 217-81 dated November 6, 1981). This is relevant in determining whether
or not the transaction had is subject to the corresponding taxes, i.e. capital gains tax and
documentary stamp tax. cdtai

Insofar as corporation are concerned, its liability to the capital gains tax imposed on the
presumed gains realized from the sale, exchange or disposition of lands and/or buildings
is governed by Section 27(D)(5) of the Tax Code of 1997 viz.:
"(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands
and/or Buildings. — A final tax of six percent (6%) is hereby imposed on the gain
presumed to have been realized on the sale, exchange or disposition of lands
and/or buildings which are not actually used in the business of a corporation and
are treated as capital assets, based on the gross selling price or fair market value
as determined in accordance with Section 6(E) of this Code, whichever is higher,
of such lands and/or buildings."

The clear import of the foregoing is that for a corporation to be liable to the tax, a true sale,
exchange or disposition of capital assets must have transpired. Unlike in transactions
made by individuals under Section 24 (D)(1) of the Code, where all sales of real property
classified as capital assets, including pacto de retro or other forms of conditional sales
are subject to the capital gains tax, no similar qualifications exist for capital asset
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 transaction of a corporation. Hence, the latter is subject to such tax only upon a close and
completed transaction in which income is realized. "A closed transaction for tax purposes
results from a contract of sale which is absolute and unconditional on the part of the seller
to deliver to the buyer a deed upon payment of a consideration and by which the purchaser
secures immediate possession and exercises all the rights of ownership" (Comm. vs.
Union Pacific R. Co., 86 F (2d) 637 CCA 2 nd, 1936 Mertens, Chap. 12.118 Vol. 2, p. 326).
Corollarily, "income consists of realized appreciation of capital or investment and realized
returns, either in the form of receipts or benefits, flowing from the use of capital, services,
activities or acts of the taxpayer, or which come to the taxpayer other than as a return of
capital or investment, or as a substitution of money value for something permanently lost."
(U.S. vs. Supplee-Biddle Hardware Co., 265 U.S. 189, L.Ed. 970, 44 S. Ct. 546 (1924)
Mertens, Chap. 5.04, Vol. 1, p. 165). Hence, realization of income includes the requirement
that the transaction be closed or consummated before any taxable income may result.
"Any substantial conditional element in a transaction will postpone taxability" (Michigan
Steel Corporation of New Jersey, 38 BTA 435, Mertens, Chap. 12.120, Vol. 2, p. 330).
Accordingly, this Office is of the opinion and so holds that only upon the execution of the
final absolute deed of sale covering any of the above-described properties of the bank
subject of the pacto de retro, will the payment of the 6% capital gains tax apply. cdlex

By the same token, since no actual conveyance of real property is to be made, the stamp
tax on deeds of sale and conveyances of real property imposed under Section 196 shall
not apply. However, since the transaction is in the nature of an equitable mortgage and
made primarily as a security for the payment of a pre-existing loan, the same is subject
instead to the rate of documentary stamp tax imposed under Section 195 (Stamp Tax on
Mortgages, Pledges and Deeds of Trust), thus —
"SEC. 195. Stamp Tax on Mortgages, Pledges and Deeds of Trusts. — On every
mortgage or pledge of lands, estate, or property, real or personal, heritable or
movable, whatsoever, where the same shall be made as a security for the
payment of any definite and certain sum of money lent at the time or previously
due and owing or forborne to be paid, being payable, and on any conveyance of
land, estate, or property whatsoever, in trust or to be sold, or otherwise converted
into money which shall be and intended only as security, either by express
stipulation or otherwise, there shall be collected a documentary stamp tax at the
following rates:
(a) When the amount secured does not exceed Five thousand pesos (P5,000),
Twenty pesos (P20.00).
(b) On each Five thousand pesos (P5,000) of fractional part thereof in excess of
Five thousand pesos, an additional tax of Ten pesos (P10.00).
xxx xxx xxx"

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

Very truly yours,

(SGD.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue
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