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Involuntary Conversion of Real Property

The Philippine Reclamation Authority (PRA) inadvertently appropriated land owned by P Corp during an infrastructure project. To remedy this, PRA and P Corp agreed to exchange the affected land for PRA-owned lots of equal value. They executed a Deed of Exchange, but it contained a technical error regarding one of the lands. An Amended Deed was executed to correct this error without additional consideration. The BIR ruled that the exchange was an involuntary conversion not subject to income tax, as the appropriation was inadvertent. It also ruled the Amended Deed was only to correct an error and not subject to certain conveyance taxes.

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30 views1 page

Involuntary Conversion of Real Property

The Philippine Reclamation Authority (PRA) inadvertently appropriated land owned by P Corp during an infrastructure project. To remedy this, PRA and P Corp agreed to exchange the affected land for PRA-owned lots of equal value. They executed a Deed of Exchange, but it contained a technical error regarding one of the lands. An Amended Deed was executed to correct this error without additional consideration. The BIR ruled that the exchange was an involuntary conversion not subject to income tax, as the appropriation was inadvertent. It also ruled the Amended Deed was only to correct an error and not subject to certain conveyance taxes.

Uploaded by

andreaivydy1993
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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EXCHANGE OF REAL PROPERTY TO CORRECT THE INADVERTENT

APPROPRIATION STILL CONSIDERED INVOLUNTARY CONVERSION NOT


SUBJECT TO INCOME TAX.
BIR Ruling No. DA-044-2007 dated January 29, 2007.

Facts:
In the course of undertaking one infrastructure project, Philippine Reclamation
Authority (PRA) inadvertently appropriated land owned and registered under the name of P
Corp. Consequently, PRA and P Corp. entered into a Memorandum of Agreement (MOA)
whereby PRA agreed to replace the affected land with PRA-owned lots of equal value to be
determined based on the appraisal reports of two independent appraisal companies.
Pursuant to the MOA, PRA and P Corp. executed a Deed of Exchange of Real Property
implementing the exchange of the subject properties. The parties thereafter paid DST on
conveyances of real property for said Deed of Exchange. Upon subsequent examination, it
was discovered that an error was committed in the quoted technical description of one of
the lands subject of the executed deeds. To correct the mistake, an Amended Deed of
Exchange was executed without any additional consideration other than those agreed upon
based on the Deed.

Ruling:
The execution of the Deed of Exchange of Real Property in this case partakes the
nature of involuntary conversion. The absence of an actual expropriation does not affect the
applicability of the Doctrine of Involuntary Conversion. Consequently, the execution of the
Deed of Exchange does not negate the fact that the transaction falls within the purview of the
doctrine of involuntary conversion. In view of this, the exchange is not subject to income tax
and creditable withholding tax. The Amended Deed of Exchange is no longer subject to DST
on conveyances of real property pursuant to Section 196 of the Tax Code of 1997 as it was
executed merely to correct the error in the previously executed deed or instrument. The
Amended Deed of Exchange is however subject to the P15.00 DST imposed under Section
188 of the same Code.

Doctrine of involuntary conversion of property


If the property is involuntarily converted into cash and the money is used for buying another
land, the ownership of the other land is a continuity of the ownership of the first lot. The
involuntary disposition of the property and the acquisition of a like kind DO NOT make the
money a “realized property”. (a mere return of capital)

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