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Paolo entered into a Contract to Sell with Suga Land, Inc. (Suga Land) for the purchase of a three-bedroom penthouse located in Rockwell, Makati…

2026 Bar Exam · Commercial & Taxation Law · Question 17 · Essay

The question

Paolo entered into a Contract to Sell with Suga Land, Inc. (Suga Land) for the purchase of a three-bedroom penthouse located in Rockwell, Makati. Under the Contract to Sell, Paolo agreed to pay Suga Land an initial downpayment of PHP 1 million and 29 subsequent installments of PHP 1 million per month. After paying the initial downpayment and 14 monthly installments to Suga Land, Paolo and his spouse encountered marital difficulties that led to their temporary separation. Paolo decided to assign his rights under the Contract to Sell to Andres for a total consideration of PHP 15 million via a Deed of Assignment of Rights with Assumption of Liability and gave 50% of the PHP 15 million proceeds to his wife. Upon presentation of a notarized Deed of Assignment of Rights with Assumption of Liability to Suga Land, Andres was informed that a 6% capital gains tax must first be paid by Paolo to the Bureau of Internal Revenue (BIR) before Suga Land can recognize the assignment and record Andres as the new buyer in its system database. Should Paolo pay the 6% capital gains tax to the BIR? Explain.

Held

No, Paolo should not pay the 6% capital gains tax to the BIR before Suga Land recognizes the assignment and records Andres as the new buyer, under Section 56 of the National Internal Revenue Code and the ruling in Chua v. Court Of Appeals, G.R. No. 119255 (2003-04-09).

Explanation

The National Internal Revenue Code requires the payment of capital gains tax on the sale or transfer of real property, and such tax must be paid on the date the return is filed by the person liable, usually the seller. The law also requires that no registration of the transfer of real property shall be effected by the Register of Deeds unless the Commissioner certifies that the tax has been paid. However, the Supreme Court in Chua v. Court Of Appeals clarified that while the capital gains tax is a liability of the seller and must be paid, payment of the tax is not a pre-requisite to the actual transfer of ownership between the parties. Ownership transfers upon the signing and notarization of the deed of sale or assignment. The registration of the sale and issuance of a new title are necessary to protect the buyer against third parties but do not affect the ownership between the original parties. The buyer and seller may agree on who pays the tax and when, but the government holds the seller liable for the tax.

Application to the facts

Paolo, as the original buyer and assignor of the Contract to Sell, is the person liable for the capital gains tax on the assignment of his rights to Andres. However, the payment of the capital gains tax is not a condition for the transfer of ownership rights between Paolo and Andres. The requirement by Suga Land that Paolo pay the 6% capital gains tax before recognizing Andres as the new buyer and recording him in their system is a procedural condition imposed by the developer, not a legal prerequisite for the assignment's validity. Paolo and Andres may agree on the payment terms of the capital gains tax, and Paolo remains liable for it. The tax must be paid when the return is filed, but Paolo is not compelled to pay it before Suga Land recognizes the assignment. The transfer of ownership rights under the Contract to Sell takes effect upon the notarized Deed of Assignment, regardless of the tax payment. The developer's policy requiring tax payment before recognition is separate from the legal effect of the assignment.

This is general legal information, not legal advice.