BIR Ruling [DA-164-04]

April 5, 2004 BIR RULING [DA-164-04] 196 DA-253-03 dtd Aug. 5, 2003 SETAHCO Corporation 873 Tetuan St., Sta. Cruz Manila Attention: Mr. Narmo P. Noblejas Liquidator Gentlemen : This refers to your letter dated March 24, 2004, inquiring into whether or not the transfer of properties to the existing stockholders in the form of liquidating dividends is subject to value-added tax, capital gains tax, creditable withholding tax and other taxes, the pertinent portions of which is quoted as follows: "SETAHCO Corporation is a domestic corporation engaged in the leasing of its real properties located in the City of Manila; On July 11, 2003, the stockholders of the SETAHCO Corporation entered into a compromise agreement in connection with the liquidation of the properties of said corporation which was approved by the Regional Trial Court of Manila, Branch 46. The aforementioned properties are described as follows: 1. No. 310-318 Dasmarias St., Binondo, Manila Total Value Commercial Lot TCT Nos. 81885 81886 Area 441.20 sq.m. 379.70 sq.m. Zonal Value per sq.m. P51,225.00 P42,050,602.50 Fair Market Value per TD 21,701,670.00 Improvements (TD No. 96-29100089) 4 Storey Building & a Warehouse 10,102,650.00 Taxable Basis P52,153,252.50 2. Otis St., Paco, Manila Commercial Lot TCT Nos. 95778 95779 Area 6,003.00 sq.m. 2,902.80 sq.m. Zonal Value per sq.m. P18,000.00 P160,304,400.00 Fair Market Value per TD (96-831-00098 102,962,950.00 Improvement owned by Lessee Taxable Basis P160,304,400.00 3. No. 92 Espeleta St., Sta. Cruz, Manila Commercial Lot TCT No. 10631 Area 311 sq.m. Zonal Value per sq.m. P29,250.00 P9,096,750.00 Fair Market Value per TD(C-029-96-298-00333 4,229,600.00 Improvement 1,059,930.00 Taxable Basis P10,156,680.00 Total Taxable Basis P222,614,332.50 The Documentary Stamps Tax due on the Deeds of Conveyance relative to the assignment of said inventories/properties to the existing stockholders in the form of liquidating dividends have already been paid, and deficiency taxes due thereon were also paid including penalties." In reply, please be informed as follows: 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." acSECT It is clear from the above-quoted section of Revenue Regulations No. 26 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. Accordingly, your opinion that the distribution in liquidation of the assets of SETAHCO, consisting of five (5) parcels of land to its stockholders, is not subject to documentary stamp tax is hereby confirmed. Moreover, Revenue Regulations No. 1-90, as amended by RR 6-2001 and further amended by RR 17-2003 does not apply to transfers in complete liquidation where the assets of the liquidating corporation are transferred to its stockholders in exchange for the surrender of the latter's shares of stock for cancellation by the corporation. This conveyance is without any consideration. The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered as 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 & Son Company vs. Commissioner of Internal Revenue , 10TC 840] Considering that the transfer in liquidation of land and building by SETAHCO Corporation in exchange for the surrender and cancellation of the shares is not a sale, your request for exemption from corporate income taxes, creditable withholding and documentary stamp taxes under Revenue Regulations No. 1-90, as amended by RR 6-2001 and further amended by RR 17-2003 is hereby granted. ( BIR Ruling Nos. 059 dated April 17, 1990 and 092-99 dated July 8, 1999 ) The second paragraph of Section 73 (A) of the Tax Code of 1997 states: "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." In the case of Wise & Co., Inc., et al. vs. Bibiano L. Meer, Collector of Internal Revenue (78 Phil 655 [1947]), the Supreme Court held that the amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. The Supreme Court also stated that "(W)hen the corporation was dissolved and in the process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange a transaction took place, which was no different in its essence from a sale of the same stock to a third party who paid therefor". However, liquidating gain that is, the difference between the fair market value of the properties received and the cost basis of the shares to the stockholders derived by an individual stockholder is to be treated as the gain from the sale or exchange of shares, consistent with the decision of the Supreme Court in Wise & Co., Inc., supra , subject, however, not to the 5%/10% final tax rate under Sections 24(C), 25(A)(3) or (B), 27(D)(2), 28(A)(7)(c) and (B)(5)(c) of the Tax Code of 1997, but to the ordinary income tax rates provided under Sections 24(A)(1), 25(A)(1) and (B), 27(A) or (E), 28(A)(1) or (2) and (B)(1) of the Tax Code of 1997, depending on the status of the shareholder/stockholder (for instance, whether the shareholder is a corporation or an individual, resident or non-resident). Finally, this Office also notes that a similar treatment has been given to corporate shareholders of a dissolving corporation, in that the liquidating gain realized is subject to the ordinary corporate income tax rate rather than to the then 10%/20% tax rates under Sec. 34(g) of the Tax Code, as amended by Presidential Decree 1739; or the current 5%/10% final tax rates under Section 24(c) of the Tax Code of 1997. (BIR Ruling Nos. DA-214-96 dated June 26, 1996 and 171-92 dated May 28, 1992 ) In BIR Ruling No. 039-2002 dated November 11, 2002 citing 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 shareholders pursuant to a complete or partial liquidation ( BIR Ruling No. 171-92, supra ). Accordingly, SETAHCO 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. Consequently, it is not subject to creditable withholding tax. Further, no documentary stamp tax (DST) is due on the surrender and cancellation of SETAHCO's shares. The Tax Code of 1997 imposes a DST on the sale, assignment or transfer of shares of stocks under Section 175 thereof, which in part reads: "Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfer of due-bills, certificates of obligations or shares or certificates of stock. On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of due bills, certificates of obligations, or shares or certificates of stock in any association, company or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such due-bills, certificates of obligation or stock, or to secure the future payment of money , or for the future transfer of any due-bill, certificate of obligation or stock, there shall be collected a documentary stamp tax of seventy-five centavos (P0.75) on each Two hundred pesos (P200.00), or fractional part thereof, of the par value of such due-bill, certificate of obligation or stock . . . ." (emphasis supplied) No DST under the above-quoted provision shall be due on the surrender by stockholders of the shares of stock to SETAHCO. The surrender of the shares does not constitute a sale, assignment or transfer because SETAHCO is not taking title to the surrendered shares, and the shares are retired and not retained as treasury shares. In effect, SETAHCO does not realize any benefit, as owner or otherwise, from its receipt of the shares. Moreover, since the transfer of the said properties to the stockholders as liquidating dividends was not made in the course of trade or business, the same is not subject to 10% VAT under Section 106 (A) of the 1997 Tax Code. 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 and Inspection Group