BIR Ruling [DA-311-04]

June 8, 2004 BIR RULING [DA-311-04] Secs. 73, 196, 24 (D) (1); DA-174-2003; 352-2003 Mr. Augusto D. Baas 1412 Linao Street (formerly Dart Street) Paco, Manila S i r : This refers to your letters dated August 19, 1993 and September 16, 1994 originally filed with Revenue District Office 34, Revenue Region No. 6 Manila, and referred to this Office under Reference No. 034-RDO-02014-0012 dated April 9, 2002 and February 3, 2004, requesting in behalf of your father, Bibiano Baas, Jr. for a ruling that the transfer of two parcels of land registered in the name of B. Baas and Sons, Inc. to Bibiano Baas, Jr. et al, in contemplation of the liquidation of its corporate assets is exempt from the payment of capital gains tax and to the creditable withholding tax. TDSICH It is represented that B. Baas and Sons, Inc. (Corporation) transferred real properties in favor of Bibiano V. Baas, Jr., et al (Stockholders) in exchange for the surrender of their shares of stock in the corporation; that Bibiano V. Baas, Jr., et al were among the stockholders who had expressed their intention to withdraw their participation in the operations of the corporation; that on June 30, 1991, in a special meeting held for the purpose, the Board resolved to distribute/convey in exchange for the surrender of the shares of stock of the stockholders, the following properties, to wit: Concepcion-Cabral to Clarita B. de Dios and children, Rizal Avenue-Laguna to Bibiano V. Baas, Jr. and children, and Rizal Avenue-corner Bambang to the Heirs of Alberto V. Baas; that the parties executed an Agreement dated August 17, 1991 whereby the corporation conveyed certain properties covered by Transfer Certificate of Title Nos. 61767 and 61768 to the above named stockholders in exchange for the surrender of their shares of stock of the corporation; that in a subsequent stockholders meeting held on November 16, 1991, the Board, by reason of the withdrawal of its stockholders from the corporation resolved to suspend the operations of the corporation and just let the corporate life expire; that the corporation's term of existence expired on September 12, 1995, as evidenced by a Certificate of Corporate Information from the Securities and Exchange Commission; that the stockholders paid P406,423.75 as expanded withholding tax on September 11, 1991, as evidenced by a confirmation receipt (See Annex "E") on the transfer by the corporation to them of the aforementioned properties; that it was found out later by the stockholders, on the basis of a certification which was issued by Revenue Region No. 4-A, Revenue District No. 23 that the transfer of properties by the corporation in exchange for their surrender of their shares of stock as a consequence of the impending liquidation of the corporation is exempt from the payment of capital gains tax; that the stockholders filed an application for refund dated August 19, 1993 and received by the Appellate Division on August 23, 1993; that the stockholders filed a letter request for confirmation of the exemption from tax of the above transaction; that the stockholders invoked that the two-year prescriptive period to claim the refund should not be made to apply to them since the conveyance/distribution of the aforementioned properties is not in pursuance of a sale, so no profit or gain can be attributed thereto; and that the stockholders' further opined that they should not have paid the capital gains tax because the conveyance was in the form of a liquidating dividend. In reply, please be informed as follows: In BIR Ruling No. 171-92 dated May 28, 1992, this Office ruled 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., 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). A de facto dissolution is one which takes place in substance and in fact, when the corporation by reason of insolvency, cessation of business, or otherwise, suspends all its operations and goes into liquidation while retaining its primary franchise to be a corporation (Corporation Code of the Philippines, 1999 Edition, page 708. De Leon). Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its stockholders pursuant to a complete or partial liquidation (BIR Ruling No. 171-92, supra ). cSATDC The gain realized by a stockholder from the distribution of the assets in liquidation is subject to the normal tax in like manner as if he had sold his stock to third persons. ( Wise & Co. vs. Bibiano L. Meer , 078 Phil. 655, dated June 30, 1947) Nonetheless, this Office has held that the liquidating gain, which is the difference between the adjusted cost of the shares and the fair market value of the properties given as liquidating dividend is subject to the ordinary income tax rates and not to the capital gains tax on the sale of shares. ( BIR Ruling No. 270-91 dated December 23, 1991 ) Accordingly, B. Baas and Sons, Inc. is not liable to income tax on either the transfer of its assets to its stockholders, or on its receipt of the shares surrendered by the shareholders. Moreover, no DST shall be due on the surrender by the Stockholders of their shares of stock to the corporation. The surrender of the shares does not constitute a sale, assignment or transfer because the stockholders are not taking title to the surrendered shares, and the shares are retired and not retained as treasury shares. In effect, the corporation does not realize any benefit, as owner or otherwise, from its receipt of the shares. Section 196 of the Tax Code of 1997 speaks of "all conveyances, deeds, instruments, or writings, . . ., whereby any land, tenement or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to the purchaser, or purchasers, or to any other person designated by such purchaser or purchasers, . . .". Since it has been held that a corporation that distributes its assets to its stockholders as liquidating dividends is not deemed to be selling such assets to the latter, then Section 196 of the Tax Code of 1997 shall not apply. However, the notarial certification on this deed of assignment is subject to the DST of P15.00, pursuant to Section 188 of the Tax Code of 1997. ( BIR Ruling No. 039-2002 dated November 11, 2002 ) Furthermore, this Office is of the opinion that your claim for refund of the amount representing erroneously paid capital gains tax was filed on time. 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