BIR Ruling [DA-131-04]

March 26, 2004 BIR RULING [DA-131-04] Sec. 189 RR26 196 DA 253-03 Atty. Ysobel S. Yasay-Murillo LKT Liquidator Mezzanine 909 Benavides Street Binondo, Manila Madame : This has reference to your letter dated March 12, 2004 requesting, as liquidator, for a ruling that LIM KIEH TONG & SONS, INC., is exempt from the payment of corporate income, creditable expanded withholding and documentary stamp taxes on the transfer of its remaining assets to its stockholders as liquidating dividends. It is represented that LIM KIEH TONG & SONS, INC. (LKTSI for brevity), is a domestic corporation organized and existing under the laws of the Republic of the Philippines. On March 23, 2004, the LKTSI will reach its corporate life of fifty (50) years and the stockholders have agreed to dissolve the corporation. Thus, the remaining assets consisting of ten (10) parcels of land and improvement all situated in the City of Manila and covered by Transfer Certificates of Title Nos. 52632, 52798, 52799, 52845, 52967, 52969, 52970, 52971, 125241 and 132064 all of the Registry of Deeds of the City of Manila will be distributed to its stockholders by way of liquidating dividends. Hence, this request. In reply thereto, please be informed as follows: 1. Section 189 of Revenue Regulations No. 26 otherwise known as the Documentary Stamp Tax Regulations states that: "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." It is clear from the aforequoted provision that a conveyance distributing in liquidation the assets of a corporation consisting of real estate without consideration to an owner of its capital stock is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 (BIR Ruling No. DA-253-03 dated August 5, 2003). Accordingly, the distribution in liquidation of assets of LKTSI consisting of ten (10) parcels of land and improvement to its stockholders is not subject to documentary stamp tax. 2. 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 vs. Commissioner of Internal Revenue, Respondent , 15 BTA 115; Jordan Petroleum Company, 13AFTR 2d 1692 (227) F. Supp. 174); JTS Brown & Sons Company vs. Commissioner of Internal Revenue , 10TC 840] AIaDcH Based on this pronouncement, this Office is of the considered opinion that LKTSI is exempt from the payment of corporate income and creditable expanded withholding taxes. However, the recipient of the properties that will be transferred in liquidation which in this case are the stockholders are subject to income tax on their respective gain realized, if any, consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost of their respective shareholdings in the said corporation. [Section 66(a) of the Tax Code of 1997] The Supreme Court in the case of Wise & Co., Inc. et al. vs. Bibiano L. Meer (78 Phil. 655) said that "the amounts distributed in the liquidation of a corporation shall be treated as payments in exchange stocks or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits." Finally, in consonance with Section 122 of Batas Pambansa Blg. 68 otherwise known as the Corporation Code of the Philippines, LKTSI continues as a body corporate for three (3) years after the time when it has been so dissolved, for the purpose of prosecuting and defending suits by or against it, and/or enabling it gradually to settle and close its affairs, to dispose and convey its profits and to divide its capital stock. Conversely, LKTSI should still file its income tax return during the three (3) year winding up period. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group