January 12, 2004

BIR RULING [DA-012-04]

73; 188
DA-099-2003; DA-280-2003

Victoria Homes, Inc.

RCR Business Centre
402 E. Rodriguez Avenue,
Cubao, Quezon City

Attention: Mr. Rodrigo C. Reyes

President

Gentlemen :

This refers to your letter dated November 7, 2003 requesting for a

ruling that the rescission of a Deed of Assignment in connection with a tax-
free exchange between Victoria Homes, Inc., as the transferor and Anaped
Estate, Inc., as the transferee and the execution of a Deed of Reconveyance
as a consequence thereof, is not subject to the capital gains tax, withholding
tax and documentary stamp tax.
Based on your representations, as well as from the documents
submitted, the facts are as follows:
1. On October 21, 1985, a Deed of Exchange was executed by and
between Victoria Homes, Inc. as the Transferor, and Anaped
Estate, Inc., as the Transferee. The transferor, being the absolute
and registered owner of several parcels of land located at Barrio
Tunassan, Muntinlupa City, and within the Victoria Homes
Subdivision, with an aggregate area of Seventy One Thousand
Three Hundred Fifty Five (71,355) square meters, bartered and
exchanged the aforesaid real properties to the Transferee in
exchange for shares of the latter (said titles are now in the name
of Anaped Estate, Inc. covered by several Transfer Certificates of
Title).
2. On August 24, 1987, the same parties executed a Deed of Exchange
whereby Victoria Homes, Inc., as the Transferor and the absolute
and registered owner of several parcels of land located at Barrio
Tunassan, Muntinlupa City, and within the Victoria Homes
Subdivision, with an aggregate area of Eighteen Thousand Eighty
One (18,081) square meters, bartered and exchanged the
aforesaid real properties in favor of Anaped Estate, Inc., as the
Transferee in exchange for shares of the latter (said titles are
now in the name of Anaped Estate, Inc. covered by several
Transfer Certificates of Title).
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 3. Pursuant to the said two Deeds of Exchange, Victoria Homes, Inc.
had transferred all its titles over the 71,355 and 18,081 square
meters of land, thereby causing the cancellation of the old titles
and the issuance of new ones in the name of Anaped Estate, Inc.
On the other hand, Anaped Estate, Inc. had failed to deliver to
Victoria Homes, Inc. the corresponding 7,500 shares of stocks as
well as the shares of stocks covering the value of Four Hundred
Eighty One Thousand Eight Hundred Pesos (P481,800.00) of
Anaped Estate, Inc. thereby failing to comply with what was
incumbent upon it under the two Deeds of Exchange.
4. After the aforesaid transfer, Anaped Estate, Inc. also failed to
develop and improve the said properties for lack of sufficient
funds. The respective parties' Board of Directors at their Special
Meeting have unanimously approved that the parties (Transferor
and Transferee) shall reconvey unto each other by way of Deed
of Reconveyance the properties which they have previously
exchanged with each other.
5. In support of your request, you submitted the following
documents: (1) Deed of Exchange dated October 21, 1985
with the attached list of 103 properties subject thereof; (2)
Deed of Exchange dated August 24, 1987 with the attached
list of five (5) properties covered by TCT Nos. 141368;
184344; 149866; 150011; and 149999; (3) Deed of
Rescission of Previously Executed Deeds of Exchange; and
(4) Deed of Reconveyance. IHaSED

In reply thereto, please be informed that rescission of a contract does

not give rise to a taxable event for two reasons: (a) the result of rescission is
that it is as if there was no sale, transfer or exchange, and hence, no income
is realized; and (b) the return of the object of the rescinded contract is not
for monetary consideration and is merely an acknowledgment or
confirmation of the title and ownership of the original owner of the property.
(BIR Ruling No. DA-280-2003 dated August 25, 2003)
Thus, the subsequent return of the One Hundred Three (103) parcels of
land subject of the Deed of Exchange dated October 21, 1985 as well as the
five (5) parcels of land subject of the Deed of Exchange dated August 24,
1987 to Victoria Homes, Inc. is a necessary consequence of a rescission of
the contract.
In BIR Ruling No. 059-92 dated February 18, 1992, citing Article 1191
of the Civil Code on contract rescission, it was ruled that no gain shall be
recognized on the return of the real property upon the rescission of a deed
of absolute sale resorted to by the buyer due to the seller's non-compliance
with his obligation to deliver the realty sold. It was likewise ruled that the
deed of rescission shall not be subject to the documentary stamp tax under
Section 196 of the Tax Code of 1997, but only to the documentary stamp tax
of P15.00 under Section 188 of the same Code.
Accordingly, the subsequent return of the aforesaid properties to
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 Victoria Homes, Inc. is not subject to the capital gains, withholding and
documentary stamp taxes since it is a mere reconveyance of the object of
the rescinded contract and is not for monetary consideration. Besides,
Section 73 of the Tax Code of 1997 provides that only distribution made by a
corporation to its shareholders out of its earnings or profits, whether in
money or property are taxable. (A. Soriano Corporation vs. Commissioner of
Internal Revenue, CTA Case No. 3710, July 4, 1991, affirmed in
Commissioner vs. A. Soriano Corporation and CTA, CA-G.R. SP No. 26017,
January 15, 1993; Commissioner vs. Brown, CA (7) 69 Fd. 602) Under the
aforesaid contract between Victoria Homes, Inc. and Anaped Estate, Inc.,
there is no provision regarding any distribution of corporate earnings or
profits by Anaped Estate, Inc.
THEREFORE, Victoria Homes, Inc. will not realize any taxable gain from
the return of the aforesaid properties. Victoria Homes, Inc. will not receive
any net beneficial income nor realize any income which is required by the
Tax Code for redemption of the properties to be a taxable event.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation, it will be ascertained that the
facts are different, then this ruling shall be considered null and void.

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) MILAGROS V. REGALADO

Assistant Commissioner
Legal Service

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