R J Dureza & Associates

January 30, 2008 BIR RULING [DA-051-08] 64 (B), 196, 24 (D) (1); DA-092-09 7/08/99 R J Dureza & Associates No. 20 San Jose cor. Tolentino Streets San Francisco Del Monte Quezon City Attention: Mr. Romeo J. Dureza Gentlemen : This refers to your letter dated October 18, 2007 requesting for a ruling relative to the distribution of a corporation's asset/properties to its stockholders as a result of the dissolution of the said corporation. It is represented that Adora Graphic Printers, Inc. (AGPI) is a domestic corporation with TIN No. 000-848-492-000; that it is in the process of dissolution and liquidation; that as a result of the said dissolution and liquidation, AGPI will distribute its corporate asset/properties to its stockholders; that in support of its request, it submitted the following documents: 1. Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission 2. Minutes of the Special Stockholders Meeting dated August 10, 2007 3. Photocopy of TCT No. RT 25976 (295421) in the name of AGPI 4. Photocopies of Tax Declaration Nos. E-096-00094; D-096-02721 and D-096-05821, all in the name of Adora Graphic Printers, Inc. that BIR Form 1905 for the cancellation of BIR Certificate of Registration, as well as BIR Clearance had been submitted to BIR RDO 038 on September 14, 2007; and that since the corporation has no obligations to its suppliers/creditors, the stockholders of the aforesaid corporation declared the aforesaid properties as property dividends and/or liquidating dividends and that the same shall be divided among themselves (all stockholders) in equal share. In reply, please be informed that as follows: 1) Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations, as last amended by Revenue Regulations No. 2-98, implementing Section 64 (B) of the Tax Code of 1997, does not apply to transfers in complete liquidation where the assets of the liquidating corporation are transferred to its stockholders in exchange for the surrender of the latter's shares of stock for cancellation by the corporation. This conveyance is without consideration. DTEAHI The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered as a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. [ W. P. Fax & Sons Inc., Petitioner v. Commissioner of Internal Revenue, Respondent , 15 BTA 115; Jordan Petroleum Company, 13 AFTR 2d 1692 (227 F. Supp. 174); J.T.S. Brown & Son Company v. Commissioner of Internal Revenue , 10 TC 840]. Hence, the transfer by AGPI of its assets, i.e., one (1) parcel of land, to its controlling stockholders by way of liquidating dividends is not subject to the expanded creditable withholding tax imposed under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, as last amended by Revenue Regulations No. 2-98 (BIR Ruling No. 059-90 dated April 17, 1990), and consequently, the same is not subject to the corporate income tax. 2) Section 189 of Revenue Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations provides, viz .: "Section 189. Conveyances by corporation to owner of all the capital. A conveyance of real estate by a corporation without valuable consideration to an owner of all its capital stock in consequence of its dissolution is not subject to tax." Under the above-quoted Section 189 of Revenue Regulations No. 26, a conveyance distributing in liquidation the assets of a corporation consisting of real estate without consideration to the majority owner of its capital stock is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. Accordingly, the distribution in liquidation of the assets of AGPI, consisting of one (1) parcel of land, to its stockholders, is not subject to the documentary stamp tax prescribed under Section 196 of the Tax Code of 1997. (BIR Ruling No. 059-90 dated April 17, 1990). However, the second paragraph of Section 73 (A) of the Tax Code of 1997 states: "Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be." Thus, in the event that the liquidating dividend in the form of properties is more than the amount/value of investment, the gain realized by a stockholder from the distribution of the assets in liquidation is subject to the normal tax in like manner as if he had sold his stock to third persons. ( Wise & Co. vs. Bibiano L. Meer , 078 Phil. 655, dated June 30, 1947) Nonetheless, this Office has held that the liquidating gain, which is the difference between the adjusted cost of the shares and the fair market value of the properties given as liquidating dividend is subject to the ordinary income tax rates and not to the capital gains tax on the sale of shares. (BIR Ruling No. 270-91 dated December 23, 1991) 3) The sale by the stockholders of AGPI of the distributed asset received by them as return of investment immediately after title thereto is transferred to their names shall be subject to the final capital gains tax imposed under Section 24 (D) (1) of the Tax Code of 1997. (BIR Ruling No. 021-89 dated February 1991) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. IDSaAH Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service