BIR Ruling [DA-109-97]

March 19, 1997 BIR RULING [DA-109-97] Go Cojuangco Mendoza & Ligon Suite 52 Legaspi Suites 178 Salcedo St., Legaspi Vill. Makati City Attention: Atty . Laurence B . Arroyo Gentlemen : This refers to your letter dated September 13, 1995 in behalf of your client, Rogelio de Jesus & Sons, Inc., a domestic corporation duly registered with the Securities & Exchange Commission (SEC) under SEC Registration No. 184968 stating that your said client is engaged in the buying, selling, distributing and marketing of all kinds of goods, commodities, and merchandise; that it presently owns three parcels of land, two of which are located in Quezon City and the third one is located in Pasig City; that the stockholders and board directors passed a resolution dissolving the company and liquidating its remaining assets consisting of the three (3) parcels of land by distributing the same to its stockholders in proportion to the shareholding of each stockholder; and that you took note of BIR Ruling No. 322, Series of 1987 which you believe is still applicable to date, the pertinent portions of which read as follows: LLphil "In reply, I have the honor to inform you that since the individual stockholders of your company will receive upon its complete liquidation of all its assets as liquidating dividends, they will thereby realize capital gain or loss. The gain, if any, derived by the individual stockholders consisting of the difference between the fair market value of the liquidating dividends and adjusted costs to the stockholders of their respective shareholdings in the said corporation [Sec. 83(a), Sec. 256, Income Tax Regulations] shall be subject to income tax at the rates prescribed under Section 21(a) of the Tax Code, as amended by Executive Order No. 37. "Moreover, pursuant to Section 34(h) of the Tax Code, as amended by Executive Order No. 37, only 50% of the aforementioned capital gain is reportable for income tax purposes if the shares were held by the individual stockholder for more than twelve months and 100% of the capital gains if the shares were held for less than three months." Based on the foregoing representations you are now requesting for a ruling on the tax consequence of the aforesaid contemplated dissolution, liquidation and distribution of the corporate assets to each stockholder and together or not the aforequoted BIR Ruling No. 322 Series of 1987 is still in effect in view of the latest amendments to the National Internal Revenue Code. In reply, please be informed that the tax consequence of the contemplated dissolution and liquidation of your said client are as follows: 1) The liquidating corporation, Rogelio de Jesus & Sons, Inc. is not subject to any tax for receiving from its stockholders and then cancelling the shares surrendered by the stockholder. (BIR Ruling No. 171-92) 2) Rogelio de Jesus & Sons, Inc., in transferring its real estate properties to its stockholders representing the return of their investments in the said corporation, is not subject to any income tax and is therefore, not subject to the creditable expanded withholding tax of 7.5% imposed under Revenue Regulations No. 6-85 as amended by Revenue Regulations No. 12-94 implementing Section 50(b) of the Tax Code, as amended. The transfer by the liquidating corporation for its remaining assets to its stockholders is not considered as a sale of these assets. Thus, Rogelio de Jesus & Sons, Inc., as the liquidating corporation does not realize gain or loss in partial or complete liquidation (W.P. Fox & Sons, Inc., Petitioner vs. Commissioner of Internal Revenue, Respondent, 15 BTA 115; Jordan Petroleum Company, 13 AFTR 2d. 1692; 227 F. Supp. 174; JTS Brown & Son Company vs. Commissioner of Internal Revenue, 10 TC 840 cited in BIR Ruling Nos. 196-010-059-90, April 17, 1990; 121-92; and 16-90) This conveyance is without any consideration, but a return of shareholders capital which is not subject to tax (BIR Ruling No. 270-91). 3) The liquidating gain realized or losses sustained by the stockholders, upon the surrender of its shares in exchange for the transfer of the real and personal properties of Rogelio de Jesus & Sons, Inc. are taxable income or deductible loss as the case may be pursuant to Section 66 of the Tax Code, as amended. cdta The gain realized or loss sustained by the individual stockholders shall be computed based on the difference between the fair market value of the real properties, book value of the investment in shares in Rogelio de Jesus & Sons, Inc., and other assets received, net of liabilities assumed, and the acquisition cost or adjusted cost of the shares surrendered by the stockholders. Moreover, the net liquidating gain on income will be subjected to income tax at the rates prescribed under Section 21(a) of the Tax Code, as amended. (BIR Ruling Nos. 119-84, 322-87, 136-88, 171-92 and UN 248-94) 4) Sections 185 and 189 of Revenue Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations provides, viz: "Section 185. Conveyances Without Consideration . Conveyances of realty, not in connection with a sale to trustees or other persons without consideration are not taxable." "Section 189. Conveyances by corporation to owner of all its 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." From the abovequoted Sections of Regulations No. 26, it is clear that a conveyance distributing in liquidation the assets of a corporation to the owners of its capital stock is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended. This Office has confirmed this in BIR Ruling Nos. 59-90, 270-90, and UN-447-95. cdti Accordingly, the Deed of Assignment to be executed by Rogelio de Jesus & Sons, Inc. covering the transfer of its real properties in favor of its stockholders in exchange for the latter's shares of stock is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended, since the conveyance in this case is without valuable consideration. Such being the case, your query as to whether or not BIR Ruling No. 322-87 still effective is answered in the affirmative but only insofar as it is consistent with this ruling. 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. cdt Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)