BIR Ruling [DA-352-03]

October 10, 2003 BIR RULING [DA-352-03] 24 (A) (1) (c), 173 DA-223-98, 028-02, 039-02 AK Management Corporation M. J. Cuenco Ave., cor. Gil Tudtud Mabolo, Cebu City Attention: Mr. Erotido L. Valdez Gentlemen : This refers to your letter dated October 8, 2003 stating that AK Management Corporation (AK, for brevity) is a corporation organized and existing under Philippine laws for the purpose of acting as managers or managing agents of persons, firms, associations, corporation, person and other entities and providing management, investment and technical advice for commercial, industrial, manufacturing and other kinds of enterprises with business address at M.J. Cuenco Ave. cor. Gil Tudtud, Mabolo, Cebu City; that it is registered with the Securities and Exchange Commission with an authorized capital stock of Twenty Million Pesos (P20,000,000) divided into Two Million (2,000,000) shares at a par value of Ten Pesos (P10.00) per share. The 2,000,000 shares are now all issued and outstanding; that on September 18, 2003, the Board of Directors of AK approved the dissolution of AK by shortening its corporate life; that this Board of Directors resolution was later ratified in a special stockholders' meeting held on October 3, 2003 by all the stockholders of AK; that it was agreed upon by all stockholders that all of the outstanding shares of AK (hereinafter referred to as AK shares of stock) shall be surrendered by such shareholders and shall be canceled accordingly by AK after the approval of the dissolution by the Securities and Exchange Commission; that in exchange for the surrender of said shares by the stockholders, AK shall transfer to the latter, its only property as liquidating dividend, that is, a contiguous parcel of raw land located in Barangay Bagumbayan, Quezon City, covered by Transfer Certificates of Title Numbers: N-246904, N-246905, N-246906 and N-246907 issued by the Registry of Deeds; and, that in support of your request, you submitted to this Office the following documents to wit: 1. AK's Articles of Incorporation; 2. AK's By-Laws; 3. Secretary Certificate issued by AK's Corporate Secretary attesting to the fact that the Board of Directors of AK has resolved to approve the dissolution of AK in its board meeting held on September 18, 2003; and 4. Secretary Certificate issued by AK's Corporate Secretary attesting to the fact that all the stockholders of AK have ratified and confirmed the decision of the Board of Directors to dissolve AK. CHATEa Based on the foregoing, you now request for a confirmation of your opinion that: "1. AK which is under liquidation is not liable for income and value added taxes on the transfer of its raw land as liquidating dividend to the stockholders in exchange for the surrender of AK shares of stock to AK; "2. Likewise, no income tax is due from AK by reason of its receipt of the shares of stocks surrendered by AK stockholders pursuant to the liquidation process; "3. Since no income tax is due there is no creditable withholding tax due from the transfer of raw land in exchange for shares of stock under Revenue Regulations 1-90; "4. No documentary stamp tax (DST) is due from the surrender and cancellation of AK shares of stock; "5. No DST is due from the transfer by way of exchange of the raw land from AK to the stockholders as liquidating dividend; "6. The gain or loss, if any, arising from said exchange is in the nature of capital gain or loss and is arrived at by getting the difference between the higher of the fair market value or zonal value and the cost or adjusted basis to the stockholders of the AK shares of stocks surrendered to AK; the gain is subject to ordinary income tax rate on individuals or corporations as the case may be. In reply, please be informed as follows: 1. 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 AFTER 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). Furthermore, Section 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. Transaction 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; "(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." ISHCcT From the aforequoted provisions, it is clear that AK, 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 contiguous parcel of raw land, to its stockholders. Consequently, it is also not subject to creditable 10% withholding VAT under Revenue Regulations No. 6-85 as amended by Revenue Regulations No. 12-94. (DA-223-98 dated June 8, 1998) 2. A liquidating corporation is not subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial liquidation (BIR Ruling No. 171-92, supra) . Accordingly, AK is not liable for income tax on its receipt of the shares surrendered by its stockholders. 3. The conveyance of the said parcel of raw land in the form of liquidating dividend shall not be subject to the creditable withholding tax on sales, exchanges or transfers of real property under Revenue Regulations 2-98. (BIR Ruling Nos. 270-91 dated December 23, 1991 and 28-02 dated July 22, 2002) 4. the Tax Code of 1997 imposes a DST on the sale, assignment or transfer of shares of stock 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 AK stockholders of the shares of stock of AK. The surrender of the shares does not constitute a sale, assignment or transfer because AK is not taking title to the surrendered shares, and the shares are retired and not retained as treasury shares. In effect, AK does not realize any benefit, as owner or otherwise, from its receipt of the shares (BIR Ruling No. 171-92 supra) . EcTCAD 5. Section 189 of 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 ." (Emphasis supplied) 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 AK's only property, that is, a contiguous parcel of raw land, to its stockholders, without monetary consideration, is not subject to DST as prescribed. under Section 196 of the Tax Code of 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. However, the notarial certification on this 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 Nos. 28-02 dated July 22, 2002 and 171-02 dated November 11, 2002). 6. 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%; 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 individuals 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. Accordingly, this Office in BIR Ruling No. 171-92 (supra) ruled once and for all thus: 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 stated in Section 39 of the Tax Code of 1997. 2. The gain, if any, derived by the stockholders consisting of the difference between the higher of the fair market value or zonal value and the cost or adjusted basis to the stockholders of their respective shareholdings in the said corporation. 3. 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. acAIES Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group