BIR Ruling [DA-223-98]

June 8, 1998 BIR RULING [DA-223-98] Atty. Alfonso Y. Go 817 State Centre Bldg. 333 Juan Luna St. Manila S i r : This refers to your letter dated May 13, 1997 requesting in behalf of your client, I-Tung Plastic Steel Mold Industrial Corporation (IPSMIC) (formerly I-Tung Plastic Manufacturing Corporation) for a ruling on the following queries: "a) Whether the corporation, in transferring the said parcel of land to the aforenamed stockholders, is subject to the corporate income tax and consequently to the creditable expanded withholding tax of 7.5%; "b) Whether the corporation is subject to the expanded value-added tax; "c) Whether the corporation is subject to the documentary stamp tax on the document transferring the land to the stockholders; and "d) Whether the stockholders to whom the property is to be distributed are subject to individual income tax covering the difference, if any, of the current market value of the property over the cost to them of their respective shareholdings in the corporation." cdta It is represented that IPSMIC was registered with the Securities and Exchange Commission (SEC) on March 13, 1991 with an authorized capital stock of P20 Million, of which P5.25 Million has been subscribed and P2.15 Million has been paid-up; that the primary purpose for which the corporation was formed is to engage in the business of designing, fabricating, making, producing or repairing all kinds of molds, dies, casts or patterns needed by the plastic industry and used in, necessary for or connected with the making of plastic wares, utensils, particles or parts thereof; that as of May 13, 1997, the principal stockholders of record of said corporation are the siblings, Joseph C. Lee and John C. Lee, who own all the outstanding capital stock of the corporation; that the other stockholders are merely holder of nominal and qualifying shares; that since the date of its organization up to the present, the corporation has not commenced any business operation; that the only transaction it had was to purchase, on June 6, 1991, a parcel of land in Barrio Kangkong, Quezon City, with an area of 931 square meters, covered by TCT No. 43684 of the Registry of Deeds of Quezon City; that the corporation is contemplating dissolution and intends to transfer its only asset consisting of the above parcel of land to its stockholders, by way of liquidating dividends; and that said corporation has no liability of any kind. In reply, please be informed that your queries are answered as follows: 1) Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations, implementing Section 50(b) of the Tax Code, as amended, 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 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. Fax & Sons Inc., Petitioner v. Commissioner of Internal Revenue, Respondent, 15 BTA 115; Jordan Petroleum Company, 13 AFTR 2d 1696 (227 F. Supp. 174); J.T.S. Brown & Son Company v. Commissioner of Internal Revenue, 10 TC 840] Hence, the proposed transfer by your client, IPSMIC, of its only asset, i.e., a parcel of land, to its aforesaid stockholders by way of liquidating dividends is not subject to the 7.5% expanded creditable withholding tax imposed under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94. (BIR Ruling No. 059-90 dated April 17, 1990); 2) Sec. 4.100-4(a)(1) of Revenue Regulations No. 7-95 otherwise known as the Consolidated Value-Added Tax Regulations, reads: "SEC. 4.100-4. Transactions Deemed Sale . (a) The following transactions shall be deemed sale pursuant to Section 100(b) of the Code. "(A) . . . "(B) . . . "(C) . . . "(D) Retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor. The following circumstances shall, among others, give rise to "transactions deemed sale" for purposes of this Section; cdti "(i) Change of ownership of the business; "(ii) Dissolution of a partnership other than a general partnership and creation of a new partnership which takes over the business." From the aforequoted provisions, it is clear that your aforesaid client, not being engaged in the realty business, is not subject to the expanded value-added tax of 10% on its contemplated transfer by way of liquidating dividends of its only asset, i.e., a parcel of land, to its aforenamed stockholders. 3) Section 189 of Revenue Regulation No. 26, otherwise known as the Documentary Stamp Tax Regulations provides, viz: "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 tax." Under the above-quoted Section 189 of Regulations No. 26, a conveyance distributing in liquidation the assets of a corporation consisting of real estate without consideration to the majority owner of its capital stock is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended. Accordingly, the distribution in liquidation of the asset of your client, IPSMIC, consisting of a parcel of land, to its majority stockholders, Joseph C. Lee and John C. Lee, is not subject to the documentary stamp tax prescribed under Section 196 of the Tax Code, as amended. (BIR Ruling No. 059-90 dated April 17, 1990); and 4) Since the individual stockholders, Joseph C. Lee and John C. Lee, of your client, IPSMIC, will receive upon its liquidation (should its contemplated dissolution materialize) all of its assets as liquidating dividends, they will thereby realize capital gain or loss. The gain, if any, received 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 said corporation [Sec. 66(a); Sec. 256, Income Tax Regulations] shall be subject to income tax at the rates prescribed under Section 24(A)(I)(a) of the Tax Code, as amended. (BIR Ruling No. 136-88 dated April 12, 1988) 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, this ruling shall be considered null and void. LibLex Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)