BIR Ruling [DA-111-05]

April 5, 2005 BIR RULING [DA-111-05] Mr. Wellington S. Lim 1045 J.P. Rizal Street Makati City S i r : This refers to your letter dated January 20, 2005 requesting clarification of BIR Ruling No. DA353-03 dated October 10, 2003, where this Office ruled that "Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial redemption. . . On the other hand, shareholders of the corporation may realize gain or loss on their receipt of liquidating dividends from the dissolving corporation. The gain or loss is measured by the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings in the said corporation ." cd2uptax05 It is your contention that the above-cited ruling which states that "the gain or loss is measured by the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders . . ." is misleading, since there is no recognition of profit subject to ordinary income tax in the distribution of assets of a liquidating corporation to its stockholders, as it is merely a return of their investment, where the aggregate book value of the real estate assets is equal or less than the investments, otherwise, it is tantamount to imposing a tax on unearned increment. Moreover, the above-cited ruling further states that the transfer is not considered a sale of its assets, hence, the liquidating corporation and the shareholders do not realize gain or loss, as the case may be, in complete liquidation to the extent that the conveyance is without any consideration, but a return of shareholders capital which is not subject to tax. In reply thereto, please be informed that after a careful restudy of the aforesaid ruling, this Office holds that indeed a liquidating corporation is not subject to tax on its receipt of the shares surrendered by its stockholders pursuant to a complete or partial liquidation, as the transfer by the liquidating corporation of its assets to its stockholders is not considered a sale of assets. ( BIR Ruling No. 059-90 dated April 17, 1990 ) Thus, Royal Oil Products, Inc., as the liquidating corporation, is not liable for corporate income tax on either the transfer of its asset to its stockholders or on its receipt of the shares surrendered by the said stockholders. ( BIR Ruling No. DA417-03 dated November 18, 2003 ) It should be emphasized, however, that the transfer of assets by a liquidating corporation to its stockholders may be likened to a declaration of property dividends under Section 24(B)(2) of the Tax Code of 1997 and there may be gain or loss on the part of the stockholders. However, since Royal Oil Products, Inc. has incurred a negative surplus of P34,947,948.59 as shown in its Financial Statements as of September 26, 2002 which indicates impairment of its capital, the stockholders of the said corporation in effect sustained losses as a result thereof. Accordingly, the receipt by the stockholders of the liquidating dividends from the dissolved corporation is not subject to income tax prescribed in Section 24(A)(1) of the Tax Code of 1997. Please be guided accordingly. aTADcH Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group