BIR Ruling [DA-196-98]

May 15, 1998 BIR RULING [DA-196-98] Orthodox Realty Incorporated 491 Paseo de Blas Valenzuela, Metro Manila Attention: Ms . Mylene I . Almeda Corporate Secretary Gentlemen : This refers to your letter dated November 5, 1997 requesting for a ruling on the tax consequence of the property dividend declaration of ORTHODOX REALTY CORPORATION (ORTHODOX) consisting of real property. It is represented that ORTHODOX is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Five Million Pesos (P5,000,000.00), divided into Fifty Thousand (50,000) shares of stock, with a par value of One Hundred Pesos (P100.00) per share; that as of October 31, 1997, it had a total stockholders' equity in the amount of Two Million Eight Hundred Sixty One Thousand Four Hundred Seventy One Pesos and Twenty Seven Centavos (P2,861,471.27), which include unrestricted retained earnings in the amount of Five Hundred Twenty Three Thousand Four Hundred Seventy One Pesos and Twenty Seven Centavos (P523,471.27); that on November 10, 1997, the Corporation declared a portion of its unrestricted retained as of October 31, 1997 as dividends, to be distributed on or before November 10, 1997 , consisting of real estate properties, which are more particularly described, as follows: Description Book Value 1. Two (2) parcels of land under TCT Nos. 152223 P70,000.00 and 152224 situated in Valenzuela, Metro Manila 2. One (1) parcel of land under TCT No. 100797 210,000.00 situated in Kalookan City Total P280,000.00 ========= that the real and personal properties are capital assets of ORTHODOX, which are used and not intended to be used in its ordinary course of business; that the properties declared as dividends were recorded in the books of the corporation at their book values; and that ORTHODOX will continue to do business and has no intention of liquidating the corporation after the declaration. Based on the foregoing, you now request confirmation that: "1. The properties declared which shall be received by the stockholders of ORTHODOX REALTY INCORPORATED can be recorded at their respective book value in the books of ORTHODOX, and its stockholder's can record the dividends thus received at ORTHODOX's book value; "2. The declared property dividend shall be subject to a final withholding tax of zero (0%) percent, and that the receiving stockholders shall not be subject to any capital or capital gains tax arising from their receipt of these real estate properties as property dividend. "3. ORTHODOX shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value of the real estate properties declared and distributed as property dividend. "4. That the amount of the documentary stamp tax on the Deeds of Conveyance to be executed between ORTHODOX and the recipient stockholders covering the real estate properties declared as property dividend shall be based on the book value of the said properties at the rate of One Peso and Fifty Centavos (1.50) on each Two Hundred Pesos (P200.00) or fractional part hereof; LLpr "5. That the tax clearance (TCL) certificate authorizing the registration of the real property in favor of the transferee recipient stockholder by the Register of Deeds, without payment of the capital gains tax, shall be secured from the RDO of the Revenue District where the corporation or transferor declaring the dividends is located as per Revenue Regulations No. 11-96. In reply, please be informed as follows: 1. The property dividends shall be recorded at their book value in the books of both the issuing corporation and the recipient stockholder. (BIR Ruling No. DA-292-97 dated August 28, 1997) 2. That the property dividends which shall be received by the individual stockholders of ORTHODOX shall be subject to a final withholding tax of zero percent (0%) and the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of the said real properties as property dividends pursuant to Section 21(c)(2) of the Tax Code, as amended by Executive Order No. 37. Furthermore, under Section 24(B)(2) of the Tax Code of 1997, income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1997, be subject to tax on dividends. 3. That ORTHODOX shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value of the real estate properties declared and distributed as property dividends. (BIR Ruling No. DA-263-97 dated August 6, 1997) This is so because there is no realized gain if the value used at the time of distribution is the book value. A company realized no taxable income in declaring a dividend since the distribution of dividends among the stockholders is not a sale nor were assets used to discharge an indebtedness. [(See General Utilities and Operating Co. v. Helvering 296 U.S. 200-207) (BIR Ruling No. 154-93 dated April 28, 1993)] 4. The documentary stamp tax on the Deeds of Conveyance to be executed by and between ORTHODOX and the recipient individual stockholders covering the real estate properties declared as property dividends shall be based on the book value of the said real estate properties at the rate prescribed under Section 196 of the Tax Code, as amended by R.A. No. 7660 inasmuch as the declaration of dividends occurred on October 31, 1997 and distributed on or before November 10, 1997. The documentary stamp tax shall be due and payable on the day of execution of the Deed of Conveyance pursuant to Section 173 of the Tax Code, as amended. (BIR Ruling Nos. 80-89 and 108-93 dated March 16, 1993) cdll 5. The tax clearance certificate authorizing the registration of the real property in favor of the transferee recipient stockholder by the Register of Deeds concerned, without payment of the capital gains tax, shall be secured from the Revenue District Officer (RDO) of the Revenue District where the corporation declaring the dividends is registered pursuant to Revenue Regulations No. 11-96. (BIR Ruling No. DA-292-97 dated August 28, 1997) Finally, the book value of the property dividends (real property) must be annotated at the back of the Transfer Certificates of Title of the real properties which shall serve as the basis for the computation of the tax upon its subsequent disposition. (BIR Ruling Nos. 156-94 dated November 6, 1994 and DA-263-97 dated August 6, 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. cdta Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)