BIR Ruling [DA-137-04]

March 26, 2004 BIR RULING [DA-137-04] DA 353-03 Mr. James T. Lee 908 Zaceteros Room 405 Sta. Cruz, Manila S i r : This refers to your letter dated January 12, 2004 stating that the Osaka Merchandising Co., Inc. is a domestic corporation engaged in the business of buying, selling at wholesale, distributing products, importing, exporting goods, wares and merchandise of every class particularly but not limited to hardware or construction materials, plates, sheets, iron bars and allied products; that Osaka Merchandising Co., Inc. stopped its commercial operations as early as 1997, as a result of accumulated staggering negative surplus in the amount of P3,429,212.06; that prior to its dissolution, Osaka Merchandising Co., Inc. was the owner of a parcel of land located at Lambakin, Marilao, Bulacan covered by TCT No. T-84.969(M) issued by the Registry of Deeds for Bulacan (Meycauayan Branch) consisting of 6,518 square meters; and that the stockholders of Osaka Merchandising Co., Inc. have agreed to liquidate the said corporation and plan to distribute the aforesaid property to its sole stockholder, James T. Lee, to represent the return of his capital invested. In connection therewith, you now request confirmation of your opinion that the transfer of the remaining property by Osaka Merchandising Co., Inc. to its stockholder in the form of liquidating dividends is not subject to income tax, capital gains tax, value-added tax and the corresponding documentary stamp tax. In reply thereto, please be informed that 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, v. Commissioner of Internal Revenue, Respondent, 15 BTA 115; Jordan Petroleum Company, 13 AFTR 2d 1692; 227 F. Supp. 174; J.T.S. Brown & Son Company v. Commissioner of Internal Revenue, 10 TC 840, cited in BIR Ruling No. 196-010-90-059-90 dated April 17, 1990 ). 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. ( BIR Ruling No. 171-92-dated May 28, 1992 ) 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. Thus, since Osaka Merchandising Co., Inc. has accumulated a negative surplus of P3,429,212.06, the shareholder of the said corporation realizes loss on its receipt of the liquidating dividends from the dissolving corporation. Accordingly, Osaka Merchandising Co., Inc. is not liable for income tax on either the transfer of its assets to its stockholders, or on its receipt of the shares surrendered by the shareholder. ( BIR Ruling No. 039-02 dated November 11, 2002 ) Neither would the conveyance by Osaka Merchandising Co., Inc. of its real property to its stockholders to the extent that such transfer represents the return of the stockholders' investments in the said corporation, be subject to any income tax and consequently, to the creditable withholding tax of 6% imposed under Section 3(J) of Revenue Regulations No. 6-2001, as amended by Revenue Regulations No. 12-2001, implementing Section 57(B) of the Tax Code of 1997. Such transfer is not considered a sale of its assets. Hence, Osaka Merchandising Co., Inc., as the liquidating corporation, and the shareholder 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 shareholder's capital which is not subject to tax. With respect to the documentary stamp tax, Section 189 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations" provides that "Sec. 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 consonance of its dissolution is not subject to tax." Under the above-quoted section, a conveyance distributing the assets of a corporation consisting of real properties 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. Accordingly, the distribution of the assets of Osaka Merchandising Co., Inc. consisting of a parcel of land to the stockholder without monetary consideration is not subject to the documentary stamp tax prescribed in Section 196 of the Tax Code of 1997. ( BIR Ruling No. 092-99 dated July 09, 1999 ) However, the notarial certification on the said deed is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the said Code. In addition, Section 196 of the Tax Code speaks of "all conveyances, deeds, instruments, or writings, . . . , whereby any land, tenement or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to the purchaser, or purchasers, or to any other person designated by such purchaser or purchasers, . . . ." Since 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, then Section 196 of the Tax Code of 1997 should not apply. ( BIR Ruling No. 092-99 dated July 8, 1999 ) However, the notarial certification on this deed or deeds of assignment is subject to the documentary stamp tax of P15.00, pursuant to Section 188 of the Tax Code of 1997. On the other hand, the surrender by the stockholder of his Osaka Merchandising Co., Inc. shares and the subsequent cancellation thereof is not subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997, since the surrender of the shares does not constitute a sale, assignment or transfer of said shares because Osaka Merchandising Co., Inc. is not taking title to the surrendered shares. ( BIR Ruling No. DA114-02-21-00 ) Finally, since Osaka Merchandising Co., Inc. has long ceased operations and the subject properties are no longer used in business and are not capital goods nor stock-in-trade, the transfer thereof to its stockholders in the form of liquidating dividends is not subject to value-added tax as prescribed in Section 106(B)(4) of the Tax Code of 1997. 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. CaAIES Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group