IN the crafting of legal provisions, the phrase ejusdem generis (“of the same kind” in Latin) is often encountered. Under the ejusdem generis principle, in which a general term follows the designation of particular things or classes of persons or subjects, that term will be construed to include those things or persons of the same class or of the same nature as those enumerated.
The Tax Code contains various provisions that may be interpreted through the application of the ejusdem generis rule. An example of this is Section 24(D)(1) of the code, which imposes taxes on “capital gains presumed to have been realized from sale, exchange or other disposition of real property” in the Philippines and classified as capital assets. From this provision, there are three transactions that are being taxed: sale, exchange or other disposition of real property.
The rules and case laws are clear on what constitute “sale” or “exchange”, but are silent with respect to the phrase “other disposition of real property”. Apparently, this phrase is preceded by “sale” and “exchange”. When applying the ejusdem generis principle, should this be interpreted to be in the same category as a sale or exchange?
Until very recently, the Bureau of Internal Revenue (BIR) issued rulings that construe “other disposition of real property”. In BIR Ruling 355-14, a real property was the subject of a real-estate mortgage. The mortgage was subsequently foreclosed and, after the redemption period had lapsed, the mortgagee successfully secured a new title under its name. The previous owner, however, subsequently filed a case against the mortgagee for declaration of absolute nullity and/or unenforceability of the promissory notes and real-estate mortgage. The court eventually dismissed the case based on a compromise agreement entered into by the parties. The court approved this agreement and required the issuance of a new title in the name of the previous owner.
The conveyance to the previous owner was then the subject of an application for ruling—that the same does not constitute a sale or exchange subject to capital-gains tax under Section 24(D)(1) of the code. The BIR ruled in the negative, holding that the conveyance of property in favor of the original owner, though pursuant to a court order approving the compromise agreement entered into by the parties to amicably settle their dispute over the property, is covered by the clause “other dispositions of real property”, which then makes it subject to the capital-gains tax.
It should be noted that a different pronouncement was made earlier in BIR Ruling 461-11. Based on this ruling, the original owner filed a case for declaration of nullity of the foreclosure proceedings. The trial court rendered judgment on the compromise, in which the defendant acknowledged that the foreclosure sale did not have any legal basis. Accordingly, the cancellation of the title in the name of the original owners and the issuance of a new title to the mortgagee also had no legal basis. Thus, titles to the properties must revert to the original owner. Insofar as the taxability of the reconvenyance of title to the original owner is concerned, the BIR ruled that, since the reconveyance is without consideration, and the reconveyance was made in order to return the properties to its legal owners, the transfer of properties is not subject to taxes.
It would appear that there is no significant difference between the facts in the two rulings to warrant a deviation of the BIR’s position. But a closer look at BIR Ruling 355-14 would show that there was no decision declaring the nullity of the foreclosure proceedings. The court dismissed the civil case, and approved, in toto, the compromise agreement entered into by the parties. So there was no pronouncement of the nullity of the title issued in the name of the mortgagee. There being a valid title in the name of the mortgagee, the issuance of a new title in the name of the original owner constitutes a disposition of a valid title in real property by the mortgagee in favor of the original owner. This makes the disposition subject to the transfer taxes.
In BIR Ruling 461-11, however, the trial court upheld the illegality of the foreclosure sale, and the compromise agreement was only issued later. With the foreclosure sale declared illegal, no valid title was issued in the name of the mortgagee. Thus, the issuance of a new title in the name of the original owner did not constitute a disposition of property by the mortgagee.
If we are to examine these rulings, a simple twist of the facts could make a difference. Nevertheless, taxpayers should be aware that, whenever there is a disposition of real property, whether voluntary or involuntary, taxes are certainly unavoidable.
The author is a senior tax specialist of the Du- Baladad and Associates Law Offices, a member-firm of the World Tax Services Alliance.
The article is for general information only, and is neither intended nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported, therefore, by a professional study or advice. For comments or questions about the article, send an e-mail to the author at reynaldo.prudenciado@ bdblaw.com.ph or call 403-2001, local 380.