Key Takeaway: The Importance of Clear Contractual Stipulations in Property Transactions

Marites Domato-Togonon v. Commission on Audit, G.R. No. 224516, July 06, 2021, 907 Phil. 54 (En Banc)

Imagine purchasing your dream property, only to find out later that the tax responsibilities you thought were clear are not what you expected. This is the reality faced by the City of Koronadal when it entered into a property transaction that led to a significant legal battle with the Commission on Audit (COA). At the heart of the case was the question of who should bear the costs of taxes and fees associated with the transfer of property ownership.

In this case, the Supreme Court of the Philippines ruled on the obligations of parties in a property transaction, specifically focusing on the payment of taxes and fees. The City of Koronadal had entered into a Deed of Absolute Sale with the heirs of Plomillo for a property intended for a new city hall site. The central issue revolved around whether the city government or the sellers should bear the costs of transfer taxes, notarial fees, and other related expenses.

Legal Context: Understanding Tax Liabilities in Property Transactions

In the Philippines, the Civil Code governs many aspects of property transactions, including the allocation of expenses related to the execution and registration of sales. Article 1487 of the Civil Code states, “The expenses for the execution and registration of the sale shall be borne by the vendor, unless there is a stipulation to the contrary.” This provision sets the general rule that the seller is responsible for these costs, but parties can agree otherwise if clearly stipulated in the contract.

Additionally, the National Internal Revenue Code (NIRC) outlines specific tax liabilities in property transactions. For instance, Section 24(D)(1) of the NIRC imposes a capital gains tax on the seller, while Section 173 and 196 address the documentary stamp tax, which can be borne by either party unless one is exempt. The Local Government Code also plays a role, with Section 133(o) prohibiting local government units from imposing taxes on themselves, which was a key point in the COA’s argument.

These legal principles are crucial for anyone involved in property transactions. For example, if a buyer and seller agree that the buyer will shoulder certain taxes, this must be explicitly stated in the contract to avoid disputes similar to the one faced by Koronadal City.

Case Breakdown: The Journey of Koronadal City’s Property Purchase

The case began when the City of Koronadal, through its City Appraisal Committee, sought to purchase land for a new city hall site. The heirs of Plomillo offered to sell their property for P30,000,000, inclusive of all costs. Later, they reduced their offer to P22,000,000, stipulating that the city government would shoulder all transfer expenses except realty taxes.

Following a positive evaluation, the Sangguniang Panlungsod authorized Mayor Fernando Q. Miguel to enter into a Deed of Absolute Sale with the heirs. However, the executed deed did not mention that the city would shoulder the transfer expenses, leading to a post-audit by the COA, which disallowed P2,398,403.02 in transfer costs, claiming these were contrary to law and regulations.

The COA’s decision was challenged by Marites Domato-Togonon, a member of the Sangguniang Panlungsod, who argued that the city’s payment of taxes was part of the contract’s consideration and did not disadvantage the city. The Supreme Court, however, upheld the COA’s disallowance, emphasizing the importance of clear contractual stipulations.

The Court’s reasoning included:

“Here, as the Commission on Audit found, the Deed of Absolute Sale has no stipulation on the expenses for the sale’s execution and registration being shouldered by the vendee. Accordingly, the general rule shall apply: The vendor shall bear the cost of the sale’s execution and registration.”

The Court also addressed the city’s hiring of a private lawyer for notarization, which was found to be in violation of COA Circular No. 98-002 and Section 481 of the Local Government Code, which generally prohibit local government units from engaging private legal services without specific conditions being met.

Practical Implications: Lessons for Future Transactions

This ruling underscores the necessity for clear and explicit contractual agreements in property transactions, particularly regarding tax liabilities and fees. For local government units, it serves as a reminder of the limitations imposed by the Local Government Code on their taxing powers and the hiring of private legal services.

For individuals and businesses, this case highlights the importance of understanding and negotiating the terms of property transactions carefully. It is advisable to:

• Ensure that all agreements regarding the payment of taxes and fees are clearly stated in the contract.
• Consult with legal professionals to navigate the complexities of property law and tax regulations.
• Be aware of the specific legal obligations and prohibitions that apply to different parties in a transaction.

Key Lessons

• Contracts must explicitly detail who will bear the costs of taxes and fees to avoid disputes.
• Local government units must adhere to legal restrictions on their taxing powers and the hiring of private legal services.
• Parties involved in property transactions should seek legal advice to ensure compliance with relevant laws and regulations.

Frequently Asked Questions

Who is typically responsible for paying taxes in a property transaction?
Generally, the seller is responsible for paying taxes such as capital gains tax and documentary stamp tax, unless otherwise stipulated in the contract.

Can a local government unit agree to pay taxes on behalf of a seller?
Yes, but this must be clearly stated in the contract, and local government units must be cautious not to violate legal prohibitions against imposing taxes on themselves.

What happens if the contract does not specify who pays the taxes?
If the contract is silent on the matter, the general rule under Article 1487 of the Civil Code applies, making the seller responsible for the costs of execution and registration.

Can a local government unit hire a private lawyer for notarization?
Generally, local government units are prohibited from hiring private lawyers for legal services unless specific conditions are met, as outlined in COA Circular No. 98-002 and Section 481 of the Local Government Code.

What should I do if I am unsure about tax liabilities in a property transaction?
It is advisable to consult with a legal professional who can provide guidance based on the specific terms of your contract and applicable laws.

ASG Law specializes in property law and tax regulations. Contact us or email hello@asglawpartners.com to schedule a consultation.