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.
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Silang (Cavite) Property (Foreclosed from Capitol City Farms,

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Inc.):

B.

TCT No.

Area (sq. m.)

T-128673
T-128674
T-128675
T-829169
T-829170
T-829171

32,290
252,354
252,354
34,542
211,231
6,582

Porac, Pampanga Property

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

C.

San Miguel, Bulacan Property (Foreclosed from Baguio Growers

and Producers, Inc.)
TCT No.

Area

T-275531
T-285532
T-275553
T-275554
T-276442

D.

78,008
78,008
1,560,267
984,298
1,009,420

San Miguel (Bulacan) Property (Foreclosed from Aseabrid Farms

Corp.)
TCT No.

Area

T-277927
T-277928
T-277929
T-277930
T-277931
T-277932
T-277933
T-277934
T-277935

E.
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1,680,064
2,472,379
459,358
240,868
1,575,235
278,891
66,067
240,000
868,738

San Miguel (Bulacan) Property (Foreclosed from Interfarms

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Livestock Feeds, Inc.)

TCT No.

Area

T-284752
T-284753
T-284754
T-284755
T-284756
T-284757
T-284758
T-284677
T-284678
T-284679
T-284680
T-277956

F.

G.

289,044
327,265
173,382
64,602
309,727
278,448
1,023,678
863,243
11,792
9,441
446,191
123,002

San Jose del Monte, Bulacan Property (Foreclosed from Gregorio

Araneta, Inc.)
TCT

Area

T-203043
T-203045

830,894
903,914

San Jose del Monte, Bulacan Property (Foreclosed from Carmel

Farms, Inc.)
TCT

Area

T-43.500(M)
T-44.782(M)

68,545
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
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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 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 2nd, 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
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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
"SECTION 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.
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Very truly yours,

(SGD.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue

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