J.R. Estrada & Sons, Inc.

February 22, 2008 BIR RULING [DA-108-08] Secs. 24 (D); 73 (A); DA-564-2004 dtd. Nov. 9, 2004 J.R. Estrada & Sons, Inc. 101 Buri, Ayala Alabang Muntinlupa City Attention: Remedios E. Alcabao President Gentlemen : This refers to your letter dated August 31, 2007, requesting exemption from the payment of corporate income, creditable expanded withholding tax and documentary stamp taxes on the proposed transfer of the corporation's remaining assets by way of liquidating dividends to its existing stockholders. It is represented that J.R. Estrada & Sons, Inc. (J.R. Estrada, for short) is a domestic corporation registered with the Securities and Exchange Commission on June 26, 1964; that it is engaged primarily in real estate business, management and administration, among other things; that the corporation had acquired parcels of land through the years by virtue of sale and/or other mode of acquisition; that however, on January 27, 2007, the stockholders through the Board of Directors, resolved to shorten the life of the corporation up to August 31, 2007; that in the same Board Resolution, it was further resolved that the nine (9) parcels of land owned by the corporation be now distributed among the stockholders by way of liquidating dividends and lastly J.R. Estrada has no liability of any kind to any creditors as well as to the Bureau of Internal Revenue. In reply, please be informed that the above transfer of properties in favor of the stockholders of J.R. Estrada & Sons, Inc. as liquidating dividends is not subject to the corporate income tax imposed under Section 27 (A) or to the capital gains tax imposed under Section 27 (D) (5) both of the Tax Code of 1997, as amended, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended. The transfer by the liquidating corporation of its assets to its stockholders is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in a partial or complete liquidation and consequently, the liquidating corporation is not liable for income tax for said transaction (BIR Ruling No. 039-02 dated November 11, 2002 cited in BIR Ruling No. DA-174-03 dated June 3, 2003. TaCDIc Anent the above, Section 73 (A) of the Tax Code of 1997, as amended, provides in part, that "where a corporation distributes all its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is taxable income or deductive loss, as the case may be". In BIR Ruling No. 039-02 dated November 11, 2002, the Commissioner had ruled that the liquidating gain, i.e., the difference between the fair market value of the properties received vis--vis the cost basis of the shares to the stockholders, derived by an individual stockholder who is a citizen or a resident alien is subject to ordinary income tax rates prescribed under Section 24 (A) (1) of the Tax Code of 1997, as amended, or under Section 25 (A) (1) and (B) thereof, in case of a non-resident alien individual. Accordingly, the gain, if any, derived by the stockholders of J.R. Estrada shall be subject to the regular income tax imposed under Section 24 of the Tax Code, as amended. cSDHEC On the other hand, pursuant to Section 189 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations", 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 this provision, a distribution in liquidation of the assets of a corporation consisting of real estate, without valuable consideration, is not subject to DST imposed under Section 196 of the Tax Code of 1997, as amended. The distribution of the assets of the corporation to its stockholders in liquidation of the business without consideration is viewed as a return of capital to the stockholders. Considering this, the provision of Section 196 of the Tax Code of 1997, as amended, shall not apply. Thus, it has been held that a corporation that distributes its assets to its shareholders as liquidating dividends is not deemed to be selling such assets to the latter. Accordingly, the transfer by J.R. Estrada of its properties to the stockholders, in proportion to their respective shareholdings, shall not be subject to DST imposed under the said Section 196 of the Tax Code, as amended. The notarial certification on the deeds of assignment, is however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Tax Code. IEDHAT Finally, the stockholders who sell the real property received by them as liquidating dividends immediately after title thereto is transferred to their name are subject to the final capital gains tax imposed under Section 24 (D) (1) of the Tax Code, as amended, in the case of individual distributees and Section 27 (D) (5) thereof, in case of corporate distributees. It bears emphasis, however, that prior to dissolution, the Bureau must investigate and determine that J.R. Estrada has no outstanding tax obligation, and if it has, the same must be settled fully before it can dissolve and distribute its remaining assets to its stockholders. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service