BIR Ruling [DA-417-03]

November 18, 2003 BIR RULING [DA-417-03] S.73, 39 039-02/11-11-02 Equity Development Corporation 262 Juan Luna Street, Binondo Manila Attention: Mr. John CB Go President Gentlemen : This refers to your letter dated September 10, 2003 requesting for clarification on the following issues: 1. Whether the corporation, in transferring a parcel of land to its stockholder in exchange for the surrender and cancellation of his stock certificates by way of liquidating dividends, is subject to the Corporate Income Tax and also to the Creditable Expanded Withholding Tax; 2. Whether the corporation is subject to the documentary stamp tax on the document transferring the land to the said stockholder in proportion to his respective shareholdings; and The facts, as you represented, are as follows: Equity Development Corporation (EDC for brevity) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC). It has an authorized capital stock of Ten Million Pesos (P10,000,000.00) divided into One Hundred Thousand (100,000) shares with par value of One Hundred Pesos (P100.00) per share. Mr. George L. Go, a stockholder of EDC, owns Three Million Six Hundred Seventy Eight Thousand Three Hundred (3,678,300) shares with a book value of Thirty Four Million One Hundred Sixty Nine Thousand and Thirty Eight Pesos (P34,169,038.00). EDC, on the other hand, owns a parcel of land with TCT No. 135340 issued by the Registry of Deeds for Makati City. As partial liquidation of EDC, a portion of the said parcel of land will be conveyed and transferred in favor of Mr. Go in exchange for the surrender of his Stock Certificates for cancellation by way of liquidating dividends. In reply, please be informed of the following: In BIR Ruling No. 039-02 dated November 11, 2002, this Office ruled that the transfer by the liquidating corporation of its remaining assets to its stockholders is not considered as sale of these assets. Hence, a liquidating corporation does not realize gain or loss in partial or complete liquidation. ( W.P Fox & Sons, Inc. v. Commissioner of Internal Revenue , 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.) Such being the case, a liquidating corporation is not 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 dated May 28, 1992) Accordingly, EDC is not liable for corporate income tax on either the transfer of its asset consisting of a portion of a parcel of land covered by TCT No. 135340 to Mr. George L. Go, or on its receipt of the shares surrendered by the said stockholder. Consequently, it is not also subject to the creditable expanded withholding tax. In the process, Mr. George L. Go, as stockholder of EDC, shall either realize capital gain or incur loss, as the case may be, when EDC distributes the said portion of a parcel of land as liquidating dividend. Specifically, Section 73 of the Tax Code of 1997 provides that: "Section 73. Distribution of Dividends or Assets by Corporation . (A) Definition of Dividends. The term `dividends' when used in this Title means any distribution made by a corporation to its shareholders of its earnings or profits and payable to its shareholders, whether in money or in other property. 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." 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. The gain, if any, derived by the individual stockholders consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings in the corporation (Section 66 (a); Sec. 256 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations) shall be subject to the ordinary income tax rates provided under Section 24(A)(1)(c) of the Tax Code of 1997. (BIR Ruling No. 039-2002, supra) Accordingly, any liquidating gain that may be realized by Mr. George L. Go shall be subject to the ordinary income tax prescribed under Section 24(A)(1) of the Tax Code of 1997. Anent your second query, Section 189 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations" provides that: "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." 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 said portion of the parcel of land in the form of liquidating dividends by EDC to Mr. George L. Go, without monetary consideration, is not subject, to DST as prescribed under Section 196 of the Tax Code of 1997. (BIR Ruling No. 214-96 dated June 26, 1996 and BIR Ruling No. 092-99 dated July 8, 1999 citing BIR Ruling No. 059-90) ATcaID In addition, 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, supra) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained 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 & Inspection Group