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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 AvenueMakati 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.

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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)

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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. BUÑAG Deputy Commissioner 

 Legal and Inspection Group

 Bureau of Internal Revenue