BIR Ruling [DA-084-05]

March 14, 2005 BIR RULING [DA-084-05] 27 (D) (5); 73; 196 #039-2002; DA-496-2004 First Christian Development Corporation 252 Buendia Avenue, Makati City Attention: Mr. Noel V. Santos President Gentlemen : This refers to your letter dated November 12, 2004 requesting for a ruling that the transfer of properties by First Christian Development Corporation ("FCDC") to its stockholders by way of liquidating dividends, as a consequence of the former's complete liquidation, is of subject to the corporate income tax, creditable withholding tax, and documentary stamp tax. It is represented that FCDC is a domestic corporation duly registered with the Securities and Exchange Commission on February 14, 1994 having an authorized capital stock of Fifty Million Pesos (P50,000,000.00); that on November 10, 2004, the Board of Directors of FCDC unanimously approved to dissolve the corporation by shortening its corporate life effective December 31, 2004 with no single transaction whatsoever, as evidenced by its filing of income tax return for non-operation; and that as a result of the dissolution, the assets of the corporation will be distributed to its stockholders by way of liquidating dividends, consisting of condominium units, as follows: NAME OF STOCKHOLDERS PROPERTY/IES (CCT NOS.) NOEL V. SANTOS 65232 65028 65025 65015 65023 65024 65016 ALEC V. SANTOS 65231 65062 65061 65060 65037 65058 RAYA V. SANTOS 65228 65063 65039 65057 65066 65052 65044 ALAN V. SANTOS 65227 65034 65050 65053 65093 MARK V. SANTOS 65229 65047 65064 65046 65051 65065 65003 RINA S. HIZON 65027 65070 65067 65036 65032 65002 ALAN V. SANTOS & MARL V. SANTOS 65056 RANDY C. SANTOS 65013 65048 65019 65035 65033 65022 65095 65043 65031 65017 65045 64886 NOEL, ALEC, ALAN, RAYA, RINA & MARK 64879 (Equal ownership) SARADA S. SANTOS 65012 2012 JADERANI S. SANTOS 65026 2112 NILO A. SANTOS 65054 2312 DOLORES A. SANTOS 65055 2314 NILO L. SANTOS 65233 3707 TBA: FOUNDATION 64887 64888 TBA: PERSON A 65029 2201 TBA: PERSON B 65030 2202 NORA S. SANTOS 65040 65041 65042 65086 65087 65234 2212 2214 2215 2602 2603 3708 MILA SANTOS TANSECO 65085 65091 65230 2601 2607 3704 ELSA L. SANTOS 65018 65020 65021 2104 2106 2107 MYRA SANTOS BRODETT 65059 65068 65069 65088 65089 65092 2403 2412 2414 2604 2605 2608 *FCDC has no liability of any kind. In reply, please be informed as follows: 1. The stockholders of FCDC shall realize capital gain or loss, as the case may be, when the latter distributes to the former its remaining assets (condominium units) as liquidating dividends. Specifically, Section 73 of the Tax Code of 1997 provides as follows: "Section 73. Distribution of Dividends or Assets by Corporation. (A) Definition of Dividends. The term `dividends' when used in this Title means any distribution made by a corporation to its shareholders of its earnings or profits and payable to its shareholders, whether in money or in other property; 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." [Underscoring ours] Liquidating gain or loss is in the nature of capital gain or loss, as the case may be, and therefore treated in the manner stated in Section 39 of the Tax Code of 1997. The gain, if any, derived by the individual stockholders consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings in the corporation (Section 66 (a); Sec. 256 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations) shall be subject to the ordinary income tax rates provided under Section 24(A)(1)(c) of the Tax Code of 1997. (BIR Ruling No. 039-2002 dated November 11, 2002) 2. The conveyance of the condominium units in the form of liquidating dividends is not subject to income tax, on the part of FCDC, either on its receipt of the surrendered shares, or its transfer of the aforesaid property to its stockholders. In BIR Ruling No. 171-92 dated May 28, 1992, this Office ruled that the transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. ( W.P. Fox & 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, cited in BIR Ruling No. 196-010-90-059-90. dated April 17, 1990). CHcESa Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its stockholders pursuant to a complete or partial liquidation (BIR Ruling No. 171-92, supra ). Accordingly, FCDC is not liable for income tax on either the transfer of its assets to its stockholders, or on its receipt of the shares surrendered by the shareholders. 3. The conveyance of the condominium units in the form of liquidating dividends is not subject to the documentary stamp tax (DST) on sale or transfer of real property imposed under Section 196 of the Tax Code of 1997. 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 ." (Underscoring and italics supplied) Under the above-quoted provision, a distribution in liquidation, without consideration, of the assets of a corporation consisting of condominium units is not subject to DST imposed under Section 196 of the Tax Code of 1997. Accordingly, the distribution of the remaining assets of FCDC to its controlling stockholders without monetary consideration is not subject to DST as prescribed under Section 196 of the Tax Code of 1997. (BIR Ruling No. 214-96 dated June 26, 1996 and BIR Ruling No. 092-99 dated July 8, 1999 citing BIR Ruling No. 059-90) In addition, Section 196 of the Tax Code of 1997 speaks of "all conveyances, deeds, instruments, or writings, . . ., whereby any land, tenement or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to the purchaser, or purchasers, or to any other person designated by such purchaser or purchasers, . . .". Since it has been held that a corporation that distributes its assets to its stockholders as liquidating dividends is not deemed to be selling such assets to the latter, then Section 196 of the Tax Code of 1997 shall not apply. However, the notarial certification on this deed of assignment is subject to the DST of P15.00, pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. 039-2002 dated November 11, 2002) It goes without saying that before the corporation can formally distribute and return its properties to its stockholders, a clearance must be obtained from the BIR that it has no outstanding tax liabilities. SAHIaD 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group