BIR Ruling [DA-226-04]

April 30, 2004 BIR RULING [DA-226-04] Liquidating Dividend 039-02; DA-174-03 Balintawak Construction Supply Corporation 227 Rizal Avenue Extension, Grace Park Caloocan City Attention: Mr . Pareto B . Patacsil Corporate Secretary Gentlemen : This refers to your letter dated March 31, 2004 requesting for a ruling that the transfer of a parcel of land covered by TCT No. 13914 of the Registry of Deeds of Caloocan City by the Balintawak Construction Supply Corporation (BCSC for brevity) in favor to its withdrawing stockholders pursuant to a partial liquidation of its corporate assets is not subject to capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997. Documents submitted show that on June 3, 2003 BIR Ruling No. DA-174-2003 was issued by this Office in favor of Ms. Ruby Bairan wherein it was ruled, in effect and among others, that the transfer of real properties by BCSC in favor of its stockholders (the Bairan siblings) as liquidating dividends in contemplation of its partial liquidation is not subject to the capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended; and that presently and in continuation of the above partial liquidation of BCSC, BCSC transferred to its stockholders a parcel of land covered by TCT No. 13914 of the Registry of Deeds of Caloocan City as a liquidating dividend. In reply thereto, please be informed that the above transfer of a parcel of land covered by TCT No. 13914 of the Registry of Deeds of Caloocan City by BCSC in favor of its stockholders as a liquidating dividend is not subject to the capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997, as amended, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended. 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 a partial or complete liquidation, and consequently, the liquidating corporation is not liable for income tax for said transaction. ( BIR Ruling No. 039-02 dated November 11, 2002 cited in BIR Ruling No. DA-174-03 dated June 3, 2003 ) Anent the above, Section 73(A) of the Tax Code of 1997 provides in part, that "where a corporation distributes all its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is taxable income or deductible loss, as the case may be." CacISA The tax treatment of the gain in the form of liquidating dividends received by the shareholders as a result of the dissolution of the corporation will, however, depend on the characterization of the income. In the case of Wise & Co., Inc. et al. vs. Bibiano L. Meer, Collector of Internal Revenue (78 Phil 655 [1947]), the Supreme Court, in interpreting a similarly worded provision of Section 73(A) of the Tax Code, found in Section 25(a) of Act No. 2833 ("Income Tax law"), as amended by Section 4 of Act No. 3761 [which is partially lifted from Section 201(c) of the US Revenue Act of 1918], adopted the judicial construction of the US Supreme Court in the case of Hellmich vs . Hellman (276 US 233). It then 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 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 High Court also stated that "when 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 essence from a sale of the same stock to a third party who paid therefore." 1 In BIR Ruling No. 039-02, supra , the Commissioner had ruled that the liquidating gain, i . e ., the difference between the fair market value of the properties received vis-a-vis the cost basis of the shares to the stockholders, derived by an individual stockholder is subject to the ordinary income tax rates prescribed under Section 24(A)(1) of the Tax Code of 1997, in case an individual is a citizen or a resident alien, or under Section 25(A)(1) and (B) thereof, in case of a nonresident alien individual. Accordingly, in the instant case, the gain, if any, derived by the withdrawing stockholders of BCSC shall be subject to the regular income tax imposed under Section 24 of the Tax Code. On the other hand, pursuant to Section 189 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations," 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 . Under this provision, a distribution in liquidation of the assets of a corporation consisting of real estate, without valuable consideration, is not subject to DST imposed under Section 196 of the Tax Code of 1997. The distribution of assets of the corporation of its stockholders or existing stockholders in liquidation of the business without consideration is viewed as a return of capital to the shareholders. Considering this, the provision of Section 196 of the Tax Code of 1997 shall not apply. Thus, it has been held that a corporation that distributes its assets to its shareholders as liquidating dividends is not deemed to be selling 2 such assets to the latter. Accordingly, the transfer by BCSC of its above parcel of land to the withdrawing stockholders, in proportion to their respective shareholdings, shall not be subject to DST imposed under said Section 196 of the Tax Code. The notarial certification on the deeds of assignment is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group Footnotes 1. BIR Ruling No. 039-02 dated November 11, 2002. 2. BIR Ruling No. 039-02, supra .