BIR Ruling [DA-114-00]

February 21, 2000 BIR RULING [DA-114-00] Ongkiko Kalaw Manhit & Acorda Law Offices 4th Floor, Cacho-Gonzalez Building Aguirre Street, Legaspi Village Makati City Attention: Mariano C . Ereso Partner Gentlemen : This refers to your letter dated January 18, 2000 requesting for a ruling on the tax implications of the liquidation of stockholdings of your clients, Ruby, Paul Vincent, Pablo III, Barnett, and Analyne , all surnamed Bairan , as represented by Ms. Ruby Bairan, in Balintawak Construction Supply Company (BCSC). It is represented that your clients, Ruby, Paul Vincent, Pablo III, Barnett, and Analyne , all surnamed Bairan , as represented by Ms. Ruby Bairan, are stockholders of the Balintawak Construction Supply Company (BCSC); that Balintawak Construction Supply Corporation (BCSC) is a domestic corporation engaged in the manufacture and sale of goods with an authorized capital stock of 100,000 shares and an outstanding capital stock of 56,000 shares, at P100 par value; that your clients collectively own 13,650.08 shares of the corporation, broken down as follows: Name of Stockholder Shareholdings Ruby Bairan 5,778.04 shares Paul Vincent Bairan 1,968.01 shares Pablo Bairan III 1,968.01 shares Barnett Bairan 1,968.01 shares Analyne Bairan 1,968.01 shares that on July 24, 1997, the parties entered into a Compromise Agreement, the execution of which became a subject of an Order of Hearing Officer Rosita Guerrero of the Securities and Exchange Commission (SEC) dated August 6, 1997; that the said Order partly provides that "Quoted hereunder is the Compromise Agreement entered into by the parties on July 24, 1997: COMPROMISE AGREEMENT 1. Any withdrawing stockholder shall be paid his/her proportionate share of the assets of the corporation; 2. The "net assets" shall mean the current value of all the real properties owned by the corporation less outstanding liabilities (if any); 3. Cuervo Appraisers, Inc. is hereby appointed at the expense of the corporation to conduct an appraisal of the real properties of the corporation and to complete the same within a period of 45 days from date hereof, submitting the appraisal report to the corporation; 4. Within 45 days from the determination of the current value of said properties, the withdrawing stockholder shall give an option to the corporation to purchase the value of hi/her share in cash. Should the corporation fail to exercise its option, the withdrawing stockholder shall give right to the remaining co-stockholders to purchase the same also within a period of 45 days from the expiration of the corporation's option; 5. If the Corporation is unable to pay the withholding stockholders in cash, they shall be paid in corporate properties using the current value as above-stated and if there should any fraction unpaid, the shall be paid in cash, provided the corporate properties being occupied by the remaining stockholders shall not be used either to pay the value of the shares of the withdrawing stockholders or any balance that may be due; 6. The San Pedro property of the corporation is excluded in determining the net asset value, provisionally, without prejudice to including the same once the title of the corporation shall have been cleared. In case of dispute as to the share participation of any stockholder, the same shall be subject to amicable negotiation. Failure to agree, the said issue shall be submitted to the SEC hearing Officer for adjudication. It being understood that if any stockholder shall receive more or less than his/her actual shareholdings as determined by final judgment, the difference shall be paid by the stockholders or the corporation, as the case may be, in cash." that pursuant to the Compromise Agreement, the parties agreed that the shares of stocks of the withdrawing stockholders will be paid with real properties previously agreed upon. On the basis of the foregoing represented facts, this Office is of the opinion as it hereby holds the following: 1. The withdrawing stockholders of the corporation shall realize capital gain or loss when the latter distributes to them its assets as liquidating dividends. The liquidating gains by the stockholders upon the surrender of shares in exchange for the transfer of the properties are in the nature of capital gains treated as taxable income to the recipient-liquidating stockholders. The tax thereon shall be subject to the final capital gains tax imposed under Section 24(C) of the Tax Code of 1997. (BIR Ruling No. 015-82, dated 20 January 1982; BIR Ruling No. 19-80, dated 6 October 1980.) 2. The conveyance of the said parcels of land in the form of liquidating dividends shall not be subject to the creditable withholding tax of 7.5% under Sec. 2.57.2(J) of Revenue Regulations No. 2-98. (See BIR Ruling UN-385-10-31-95, August 16, 1995; BIR Ruling No. 270-91, dated 23 December 1991.) The Corporation is not subject to any tax for receiving from the withdrawing stockholders the surrendered shares as a result of the partial liquidation, and for cancelling the reduced shares. It is not taking title to nor is it receiving any value for the surrendered shares. As the transaction merely carries out the terms of the Compromise Agreement, the transfer by the corporation of its assets to its stockholders is not considered as a sale of these assets, but merely a return of the shareholder's capital. There is no separate consideration between the corporation and the withdrawing stockholders, hence, no income is derived in the said transfer. The transfer of corporate asset to stockholders in exchange for the surrender of the latter's shares of stock for cancellation by the corporation is a conveyance without any consideration that is not subject to tax. (BIR Ruling Nos. 171-92; 270-91); 3. The conveyance of the parcels of land of the corporation in the form of liquidating dividends shall be subject to the documentary stamp tax (DST) imposed under Section 196 of the Tax Code of 1997. (BIR Ruling No. 270-91, dated 23 September 1991.) In all cases involving sale, exchange or any disposition of real property as in this case, where real property is being distributed, by the corporation to its stockholders as liquidating dividends, the tax base for DST purposes is the fair market value or zonal value of the real property, whichever is higher. After payment of the corresponding DST, the parcels of land conveyed by the corporation in the form of liquidating dividends may be registered by the Register of Deeds concerned in the name of the stockholders. This Ruling is being issued on the basis of the facts as represented. However, if upon investigation it will be found that the facts are different, then this Ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group