BIR Ruling [DA-253-03]

August 5, 2003 BIR RULING [DA-253-03] 196; 059-90; 092-99; 039-02 Singson Valdez & Associates Law Offices 3rd Floor, LCS Bldg. San Andres cor. Diamante Sts. Manila Attention: Atty. Manuel R. Singson Gentlemen : This refers to your letter dated October 16, 2001 in behalf of your client, J.J. Estrella Realty & Development, Inc. requesting for an exemption from the payment of corporate income, creditable expanded withholding and documentary stamp taxes on its proposed transfer of its remaining assets by way of liquidating dividends to its stockholders. It is represented that your client is the owner of six (6) parcels of land situated in Paraaque City, covered by TCT Nos. 148004, 148005, 148006, 148007, 148008 and 148009, of the Register of Deeds of Paraaque City; that its stockholders are brothers and sisters which have agreed to dissolve the corporation by shortening its corporate life; that as a consequence thereof, the aforementioned assets consisting of 6 parcels of land will be distributed to its stockholders by way of liquidating dividends. Based on the foregoing, you are now requesting for the exemption of your client from the payment of corporate income, creditable expanded withholding and documentary stamp taxes. In reply, please be informed as follows: 1. 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." 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 J.J. Estrella, consisting of 6 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 this 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 J.J. Estrella Realty 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 and 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) Moreover, as to the taxability of the stockholders receiving the liquidating dividends, the tax treatment of liquidating dividends depends on the characterization of the income in the form of such dividends received by shareholders as a result of the dissolution of the corporation in which they hold shares. 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, in interpreting a similarly worded provision as above cited as 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), where it was 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". In BIR Ruling No. 190-84 dated December 21, 1984, the issue raised was precisely whether the 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 subject to the then 10%/20% tax rates under Section 34(g) of the then Tax Code or to the graduated income tax rates under then Section 21(b). This Office ruled that such gain should be subject to the tax rates under then Section 21 (b). The same conclusion was reached in other rulings of the BIR (BIR Ruling Nos. 322-87 dated October 19, 1987; 136-88 dated April 12, 1988; 021-89 dated February 13, 1989; 270-91 dated December 23, 1991; DA-223-98). In effect, following the interpretation of these rulings, liquidating gain 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) [that is, the 25% rate], 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); or the current 5%/10% final tax rates. (see for instance BIR Ruling Nos. DA-214-96 dated June 26, 1996 and 171-92 dated May 28, 1992) This Office also takes note of BIR Ruling No. DA-367-99 dated January 24, 1999 issued under designated authority, and similar rulings where the BIR departed from the above mentioned rulings, and ruled that the liquidating gain is subject to the 5%/10% capital gains tax rate. The basis for this ruling was BIR Ruling No. 015-82 dated January 20, 1982, where the BIR held that the liquidating gain received by individual shareholders is subject to the then 10%/20% final tax, but, this ruling was effectively overturned in the subsequent BIR Ruling No. 190-84 and many other similar rulings mentioned above. Thus, BIR Ruling No. DA-529-99 and rulings similar to it have no basis, having been based on a ruling that had already been revoked. Moreover, in 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 shareholders pursuant to a complete or partial liquidation (BIR Ruling No. 171-92, supra ). Accordingly, J.J. Estrella Realty 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. Further, no documentary stamp tax (DST) is due on the surrender and cancellation of J.J. Estrella Realty's Shares. The Tax Code of 1997 imposes a DST on the sale, assignment or transfer of shares of stocks under Section 176 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 One peso and fifty centavos (P1.50) 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 J.J. Estrella Realty. The surrender of the shares does not constitute a sale, assignment or transfer because J.J. Estrella Realty is not taking title to the surrendered shares, and the shares are retired and not retained as treasury shares. In effect, J.J. Estrella Realty does not realize any benefit, as owner or otherwise, from its receipt of the shares. Accordingly, this Office rules once and for all that: 1. Liquidating gain or loss is in the nature of capital gain or loss, as the case may be, and therefore treated in the manner as stated in Section 39 of the Tax Code of 1997. 2. Liquidating gain, while characterized as gain from sale or exchange of shares, is subject to the ordinary income tax rates provided under Sections 24(A)(1)(c), 25(A)(1), 27(A) and (E), 28(A)(1) and (2) and (B)(1) of the Tax Code of 1997, depending on the status of the shareholder, and not to the 5%/10% final tax. 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