BIR Ruling [DA-214-96]

June 26, 1996 BIR RULING [DA-214-96] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Gentlemen : This refers to your letter dated October 23, 1995 requesting confirmation of your opinion on the tax implications of a partial liquidation of Alsons Realty Corporation (ARC), AGC Holdings Corporation (AGC), and Javalera Realty Corporation (JRC). It is represented that your client, Alsons Land Corporation (Alsons), is the majority shareholder of ARC, AGC, and JRC; that the Board of Directors of ARC, AGC and JRC, have decided to partially liquidate their respective companies by decreasing their authorized capital stock, pursuant to Section 122 of the Corporation Code, resulting in the creation of a reduction surplus (for each of the said companies) and the distribution of the reduction surplus as a return of capital to the principal stockholder, Alsons, using the Audited Financial Statements as of August 31, 1995; that the decrease in the authorized capital stock as of August 31, 1995, in the three corporations are as follows: 1. For ARC, from P300,000,000.00 to P16,110,700.00 or a decrease of P283,889,300.00 consisting of 2,838,893 common shares with a par value of P100.00 per share; 2. For AGC, from P700,100,000.00 to P222,000.00 Thus, the amount of decrease is P699,878,000.00 consisting of 699,878,000 common shares with a par value of P1.00 per share; and 3. For JRC, from P515,144,000.00 to P303,000.00 or a decrease of P514,841,000.00 consisting of 5,148,410 common shares with a par value of P100 per share; that to implement the partial liquidation, certain real and personal properties of ARC, AGC and JRC, respectively, as of August 31, 1995 shall be returned/transferred at net asset value to Alsons, as the principal stockholder with the latter assuming the liabilities of the former; that Alsons will surrender its shareholdings in ARC, AGC and JRC for cancellation; that except for cash, the following properties will be returned/transferred to Alsons by ARC, AGC, and JRC in exchange for the surrendered stocks: 1. In the case of ARC, (i) raw lands located in General Trias, Cavite at appraised value based on appraisal conducted on July 25, 1995 and in Cabuyao, Laguna at appraised value based on appraisal conducted on August 7, 1995, (ii) land and building located in Pasong Tamo, Makati City at appraised value based on appraisal conducted on August 7, 1995, and (iii) various accounts receivable, equipment, investment in PLDT and other assets accounts, except cash at book value as at August 31, 1995; 2. In the case of AGC, (i) investment in shares of stock in Alsons Holdings, Inc. at book value computed based on the Audited Financial Statements of Alsons Holdings, Inc., as at August 31, 1995, (ii) raw land located in General Trias, Cavite at appraised value based on appraisal conducted on July 25, 1995, and (iii) accounts receivable from Alsons Corporation at book value as at August 31, 1995; and 3. In the case of JRC, (i) investment in shares of stock in Alsons Holdings, Inc. at book value computed based on the Audited Financial Statements of Alsons Holdings, Inc. as at August 31, 1995, (ii) raw lands located in General Trias, Cavite at appraised value based on appraisal conducted on July 25, 1995, (iii) accounts receivable from Alsons Corporation and equipment at book value as at August 31, 1995. In connection therewith, you now request confirmation of your opinion as follows: 1. ARC, AGC and JRC are not subject to any tax for receiving from its principal stockholder Alsons the surrendered shares as a result of the partial liquidation and for cancelling the reduced ARC, AGC and JRC shares since they are merely performing the ministerial function of implementing the reduction in the capital stock and therefore ARC, AGC and JRC, respectively, are not taking title to nor do they receive any value for the surrendered shares. 2. The transfer to Alsons of certain real and personal properties owned by ARC, AGC and JRC, respectively, is not subject to any income tax, that is, to the 7.5% creditable withholding tax under Revenue Regulations No. 1-90, as amended by Revenue Regulations No. 12-94 since they are also performing a ministerial function required under the law to carry out the reduction of their respective capital stocks when they transfer these real and personal properties. 3. The liquidating gains realized or losses sustained by Alsons, as the principal stockholder, upon the surrender of its ARC, AGC and JRC shares, respectively, in exchange for the transfer of certain real and personal properties of the latter are taxable or deductible under Section 34 (b) and (c) (now Section 33) of the Tax Code. (Section 256, Income Tax Regulations). 4. The Deed of Assignment covering the transfer of the real properties of ARC, AGC and JRC, respectively, to Alsons in exchange for the latter's shares of stock is not subject to documentary stamp tax since the conveyance is without any consideration. In reply, please be informed that we hereby confirm your opinion on the following: That 1. ARC, AGC and JRC are not subject to any tax for receiving from Alsons the surrendered shares as a result of the partial liquidation, and for cancelling the reduced ARC, AGC and JRC shares, since they are merely performing the ministerial function of implementing the reduction in the capital stock and therefore ARC, AGC and JRC, respectively, are not taking title to nor do they receive any value for the surrendered shares. The reduced shares of ARC, AGC, and JRC, respectively, do not represent value, since they are merely the documentary evidence of the reduced capital stock and will cease to exist after their cancellation. This Office has previously ruled that a company, under partial liquidation, is not subject to any tax for receiving from its stockholders surrendered shares and for cancelling the reduced shares. (BIR Ruling No. 171-92). 2. ARC, AGC and JRC in transferring to Alsons the above-enumerated properties are not subject to income tax and are therefore not subject to the creditable withholding tax of 7.5% under Revenue Regulations No. 12-94, amending Revenue Regulations No. 1-90, since they are also performing a ministerial function required under the law to carry out the reduction of their respective capital stocks when they transferred these real and personal properties. Since there is merely a return of capital, there is no separate consideration between ARC, AGC and JRC, respectively, and their principal stockholder Alsons; hence, no income is derived in the said transfer. It is the constant holding of this Office that the transfer by the liquidating corporation of its 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. vs. Commissioner of Internal Revenue, 15 BTA 115; Jordan Petroleum, 13 AFTR 2d 1692; Brown & Son Company vs. Commissioner of Internal Revenue, 10 TC840, cited in BIR Ruling Nos. 59-90, April 17, 1990; 171-92; and 10-90). Accordingly, RR 1-90, as amended by RR 12-94, does not apply to transfers in complete or partial 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, but a return of shareholder's capital which is not subject to tax. (BIR Ruling No. 270-91). 3. The liquidating gain or losses sustained by Alsons, as the principal stockholder, upon the surrender of its ARC, AGC and JRC shares, respectively, in exchange for the transfer of the above-enumerated real and personal properties are taxable income or deductible loss as the case may be pursuant to Section 66 in relation to Section 24 (a) of the Tax Code, as amended. The gain realized or loss sustained by Alsons shall be computed based on the difference between the fair market value of the real properties, book value of the investment in shares in Alsons Holdings, Inc., and other assets received, net of liabilities assumed, and the acquisition or adjusted cost of the respective ARC, AGC and JRC shares surrendered by Alsons. Moreover, the net liquidating gain or income will be subjected to the normal corporate income tax rate of 35% as ordinary income, since Alsons is a corporate shareholder (BIR Ruling Nos. 119-84, 322-87, 136-88, 171-92, and UN248-94). The liquidating gain in a partial liquidation is taxed at 35%, as in the case of complete liquidation. (BIR Ruling Nos. 171-92; 21-89; 136-88; 322-87 and UN119-84). 4. Sections 185 and 189 of Regulations No. 26 otherwise known as the Documentary Stamp Tax provide, viz: "SEC. 185. Conveyances without consideration . Conveyances of realty, not in connection with a sale, to trustees or other persons without consideration are not taxable. "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 consequence of its dissolution is not subject to tax." It is clear from the above-quoted sections of Regulations No. 26 that a conveyance distributing in liquidation the assets of a corporation to the owners of its capital stock is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended. cd Accordingly, the Deed of Assignment covering the transfer of real properties of ARC, AGC and JRC, respectively, to Alsons in exchange for the latter's shares of stock is not subject to the documentary stamp, tax since the conveyance is without valuable consideration. (see Oranbo Realty Corporation vs. CIR, CTA Case No. 4820, promulgated January 23, 1995.) This will serve as the authority for the Revenue District Officer under whose administrative jurisdiction the real properties subject of the partial liquidation are located, to issue the necessary certification authorizing transfer of title of the said real properties to be presented to the Register of Deeds concerned. (BIR Ruling No. 171-92 dated May 28, 1992). 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, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)