Tan Venturanza Valdez

May 29, 2007 BIR RULING [DA-316-07] DA-164-2004 dtd 4/5/04 Tan Venturanza Valdez 2704 East Tower Stock Exchange Center, Exchange Rd. Ortigas Center 1605 Pasig City Attention: Enrico G. Valdez & Beverly P. Mendoza Counsels Gentlemen : This refers to your letter dated June 27, 2006, in behalf of your client, BELLE BAY CITY CORPORATION (BBCC, for short), requesting confirmation of your opinion on the following: 1. That the transfer by BBCC of the reclaimed lots to its stockholders as liquidating dividends is not subject to income tax, creditable withholding tax and documentary stamp tax; 2. That the receipt of reclaimed lots, as liquidating dividends, by the shareholders of BBCC is also not subject to income tax since BBCC, as the dissolved corporation, has negative retained earnings. It is represented that BBCC was registered as a domestic corporation with the Securities and Exchange Commission (SEC) on January 31, 1996; that BBCC's Board of Directors approved a resolution on June 27, 2003 to dissolve the corporation by shortening its corporate term to January 31, 2004; that the shareholders ratified the resolution on July 10, 2003; that as a requirement of the SEC for corporations contemplating dissolution, BBCC secured a BIR tax clearance (cancellation of BIR Certificate of Registration) dated 7 December 2004; that on January 27, 2005, the SEC approved the amendment of its Articles of Incorporation to shorten its corporate term effectively dissolving BBCC; that BBCC's reclaimed lots initially had a total area of 190,000 square meters in 1997, however, with the re-alignment by the Public Estate Authority (PEA), (now succeeded by the Philippine Reclamation Authority) of Diosdado Macapagal Avenue which crossed and divided BBCC's property and the creation of road-lots and easements, the initial distribution shall consist of 138,623 square meters to be distributed to the stockholders, as follows: Stockholders Area (in Sq. m.) Belle Corporation 61,244 Subic Bay Resort (HK) Ltd. 2,899 Sinophil Corporation 4,348 D.M. Wenceslao & Association, Inc. 52,642 Landbank of the Philippines 7,482 Kingson Sian 2,680 Josephine Manalo 2,015 Vickers Ballas Holdings Ltd. 2,010 Josephine Manalo/Jaime C. Gonzalez 1,963 Delfin J. Wenceslao, Jr. 1,340 Total 138,623 ====== that a subsequent and final distribution is expected to be made once the Philippine Reclamation Authority replaces the lots lost by BBCC on account of the re-alignment of Diosdado Macapagal Avenue; that the audited financial statement of BBCC for the year ending December 31, 2004 reflects a negative retained earnings of P232,302,925.00; that a tentative financial statement as of 31 December 2005 reflects a higher negative retained earnings of P245,378,550.00; and that therefore, for that matter, BBCC has been in a negative retained earnings position since 1999. In reply, please be informed as follows: 1. The transfer by BBCC of the reclaimed lots to its stockholders as liquidating dividends is not subject to income tax, creditable withholding tax and documentary stamp tax . Income and Creditable Withholding Tax 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. Fox & Sons, Inc., Petitioner vs. Commissioner of Internal Revenue, Respondent , 15 BTA 115; Jordan Petroleum Company, 13 AFTR 2d 1692 (227 F. Supp. 174); JTS Brown & Son Company vs. Commissioner of Internal Revenue , 10TC 840] 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. Documentary Stamp Tax Revenue Regulations No. 26 otherwise known as the Documentary Stamp Tax Regulations provide, 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 BBCC, consisting of reclaimed lots in Manila Bay Reclamation Area, is not subject to documentary stamp tax is hereby confirmed. Under the above-quoted provision, a distribution in liquidation, without consideration, of the assets of a corporation consisting of real estate is not subject to DST imposed under Section 196 of the Tax Code of 1997. Accordingly, the distribution of the assets, without monetary consideration, is not subject to DST as prescribed under Section 196 of the Tax Code 1997. (BIR Ruling No. DA-214-96 dated June 26, 1996 and BIR Ruling No. 092-99 dated July 8, 1999 citing BIR Ruling No. 059-90.) In addition, Section 196 of the Tax Code 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 shareholders 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. In the same manner, the Tax Code of 1997 imposes a DST on the sale, assignment or transfer of shares of stocks under Section 175 as amended, 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 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 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 seventy-five centavos (P0.75) on each Two hundred pesos (P200.00), or fractional part thereof, of the par value of such stock . . ." (emphasis supplied). No DST under the above-quoted provision shall be due on the surrender by stockholders of the shares of stock to BBCC. The surrender of the shares does not constitute a sale, assignment or transfer because BBCC is not taking title to the surrendered shares, and the shares are retired and not retained as treasury shares. In effect, BBCC does not realize any benefit, as owner or otherwise, from its receipt of the shares. cHSIDa On this score, considering that the transfer in liquidation of reclaimed lots by BBCC in exchange for the surrender and cancellation of the shares is not a sale, your request for confirmation for exemption from corporate income tax and creditable withholding tax 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. 059-90 dated April 17, 1990 and 092-99 dated July 8, 1999). Similarly, based on preceding discussion, no DST is due under Sections 175 and 196 of the Tax Code as amended. However, the notarial certification on the deed or deeds of assignment is subject to the documentary stamp tax of P15.00, pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. 39-02) 2. The receipt of reclaimed lots as liquidating dividends by the stockholder, is a taxable income or a deductible loss, as the case may be . 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 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 therefore." However, liquidating gain, which 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 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 Section 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] 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). CTcSAE 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 under Sections 27 (A) or (E), 28 (A) (1) or (2) and (B) (1) of the Tax Code of 1997, rather than to the then 10%/20% tax rates under Sec. 34 (g) of the Tax Code, as amended by Presidential Decree 1739; or the current 5%/10% final tax rates under Section 27 (D) (2) of the Tax Code of 1997 (BIR Ruling Nos. DA-214-96 dated June 26, 1996 and 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, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue