BIR Ruling [DA-140-03]

April 29, 2003 BIR RULING [DA-140-03] 24 (D) (1); 73; 196; #039-2002 Judge Priscilla C. Mijares No. 72, Road 3, Project 6 Quezon City M a d a m : This refers to your letter dated September 26, 2002 requesting for a ruling that the transfer of the Condominium Certificate of Title No. 10417 registered in the name of V & C Realty Management, Inc. to your name as a consequence of the former's complete liquidation is exempt from the payment of capital gains tax and to the creditable withholding tax. Based on the representations, as well as from the documents submitted, the facts are as follows: 1. In 1990, you acquired a condominium unit located at the Midland Plaza Condominium and thereafter transfer the title thereof to V & C Management, Inc. ("V & C" for brevity) as your contribution to the latter, a family corporation. 2. On May 31, 2001, the Securities and Exchange Commission (SEC) issued an Order directing V & C to show cause why its Certificate of Registration should not be suspended or revoked for not commencing its business operations within a period of two (2) years from the date of its registration. 3. On May 28, 2002, the SEC issued another Order revolting V & C Realty's Certificate of Registration. 4. Thereafter, you requested before the Register of Deeds of Manila to transfer the title of the aforesaid condominium unit back to you as a return of your capital contribution, accompanied with a Certification duly signed by Onofre Villaluz, President of V & C, stating therein that the Condominium Unit 819 at Midland Plaza Condominium is the sole property of Judge Priscilla C. Mijares, after the revocation of V & C's Certificate of Registration. 5. The Register of Deeds of Manila did not give his conformity but advised the undersigned (Judge Priscilla C. Mijares) to proceed to the Land Registration Authority (LRA) which has jurisdiction over all Register of Deeds in the Philippines and to bring up the case "en consulta". 6. The Register of Deeds of Manila did not consider the Certification executed by Onofre Villaluz and the revocation of the Certificate of Registration of V & C sufficient, but instead required a Court Order for purposes of transferring the title of the condominium unit back to Judge Mijares. 7. Upon payment of the required fees, the "Consulta" was scheduled for hearing and on September 5, 2002, the LRA issued its Resolution citing the case of Clemente vs. Court of Appeals ( G.R. No. 82407 dated March 27, 1995 ), the penultimate and dispositive portion of the LRA Resolution states as follows: "Applying the above-quoted ruling in the case under consideration, petitioner may execute a unilateral deed of extrajudicial adjudication of ownership of the subject condominium unit, and thereafter submit the same for registration to the office of the respondent Registrar of Deeds. WHEREFORE, this Authority is of the opinion and so holds that Condominium Certificate of Title No. 10417 may be registered in the name of petitioner, only upon execution by the latter of a unilateral deed of extrajudicial adjudication of ownership and upon compliance with all other registration requirements." 8. The resolution was then presented to the Office of the Register of Deeds of Manila together with the Affidavit of Extrajudicial Adjudication of Ownership as contained in the aforesaid Resolution, stating among others that you are the only stockholder of the V&C and that the subject condominium unit is the only remaining asset of V&C. The examiner of the Register of Deeds of Manila gave your secretary a list of expenses to be incurred before the transfer can be made, which includes Capital Gains Tax and Documentary Stamps Tax. 9. You now request that the capital gains tax and documentary stamp tax should not be imposed on the transfer of the aforesaid condominium unit since there is no sale and no profit or gain can be realized and that a quasi-judicial body such as the LRA did not in any manner intimate in its Resolution that a capital gains tax and documentary stamp tax will be due. cHTCaI 10. In support of your request, you submitted the following: (1) Copy of Condominium Certificate of Title No. 10417; (2) Order of SEC dated May 31, 2001; (3) Order of Revocation issued by the SEC dated May 28, 2002; (4) Certification executed by Onofre Villaluz, President of V & C; (5) Resolution of the LRA; (6) Affidavit of Extrajudicial Adjudication of Ownership executed by Judge Priscilla C. Mijares; and (7) List of Expenses given by the secretary of the Register of Deeds of Manila. In reply, please be informed as follows: 1. As a stockholder of V&C, you shall realize capital gain or loss, as the case may be, when V&C distributes to you its remaining asset (condominium unit) as liquidating dividends. Specifically, Section 73 of the Tax Code of 1997 provides as follows: "Section 73. Distribution of Dividends or Assets by Corporation . (A) Definition of Dividends. The term 'dividends' when used in this Title means any distribution made by a corporation to its made of shareholders of its earnings or profits and payable to its shareholders, whether in money or in other property. Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss , as the case may be." [Emphasis ours] Liquidating gain or loss is in the nature of capital gain or loss, as the case may be, and therefore treated in the manner stated in Section 39 of the Tax Code of 1997. The gain, if any, derived by the individual stockholders consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings in the corporation (Section 66(a); Sec. 256 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations) shall be subject to the ordinary income tax rates provided under Section 24(A)(1)(c) of the Tax Code of 1997. ( BIR Ruling No. 039-2002 dated November 11, 2002 ) 2. The conveyance of the condominium unit in the form of liquidating dividends is not subject to income tax, on the part of V&C, either on its receipt of the surrendered shares, or its transfer of the aforesaid property to Judge Priscilla Mijares. In BIR Ruling No. 171-92 dated May 28, 1992, this Office ruled 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 stockholders pursuant to a complete or partial liquidation (BIR Ruling No. 171-92, supra ): Accordingly, V&C 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, Judge Priscilla Mijares. 3. The conveyance of the condominium unit in the form of liquidating dividends is not subject to the documentary stamp tax (DST) on sale or transfer of real property imposed under Section 196 of the Tax Code of 1997. Section 189 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations" provides, viz. : "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 ." (Emphasis supplied) Under the above-quoted provision, a distribution in liquidation, without consideration, of the assets of a corporation consisting of real estate is not subject to DST imposed under Section 196 of the Tax Code of 1997. Accordingly, the distribution of the remaining asset of V&C to its controlling and sole stockholder, Judge Priscilla Mijares, without monetary consideration, is not subject to DST as prescribed under Section 196 of the Tax Code of 1997. ( BIR Ruling No. 214-96 dated June 26, 1996 and BIR Ruling No. 092-99 dated July 8, 1999 citing BIR Ruling No. 059-90 ) In addition, Section 196 of the Tax Code of 1997 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 stockholders as liquidating dividends is not deemed to be selling such assets to the latter, then Section 196 of the Tax Code of 1997 shall not apply. However, the notarial certification on this deed of assignment is subject to the DST of P15.00, pursuant to Section 188 of the Tax Code of 1997. ( BIR Ruling No. 039-2002 dated November 11, 2002 ) This ruling is being issued on the basis of the foregoing facts as represented. However, it upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group