BIR Ruling [DA-482-04]

September 10, 2004 BIR RULING [DA-482-04] 24 (D); 196 DA-008-2001 Verbuenco Heights Inc. 601-A Fedman Suites, 199 Salcedo Street Legaspi Village, Makati City Attention: Mrs. Taciana B. Verceles President Gentlemen : This refers to your letter dated June 25, 2004 requesting for a ruling to the effect that the distribution in liquidation of the assets of Verbuenco Heights, Inc., (Verbuenco) consisting of real property, to its stockholders is exempt from the payment of the capital gains tax, documentary stamp tax and creditable withholding tax. It is represented that in a Board Meeting held on March 29, 2004, the dissolution of the corporation was agreed upon by the board; that upon the said dissolution, ownership of one (1) parcel of land situated at 307 Molave Drive, Ayala, Alabang Village, Muntinlupa City, shall be distributed to the majority stockholders namely Lilian V. Barredo, Leyda V. Sabas and Leila B. Verceles; and that all the shares and other monies invested in the Corporation shall be divided among the said majority stockholders. In reply thereto, please be informed 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 its shareholders pursuant to a complete or partial liquidation. (BIR Ruling No. 171-92 dated May 28, 1992) On the other hand, shareholders of the corporation may realize gain or loss on their receipt of liquidating dividends from the dissolving corporation. The gain or loss is measured by the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings in the said corporation. (BIR Ruling No. 039-02 dated November 11, 2002) With respect to the documentary stamp tax, 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." Under the above-quoted section, a conveyance distributing the assets of a corporation consisting of real properties 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, the distribution of the assets of Verbuenco consisting of a parcel of land to the stockholder without monetary consideration is not subject to the documentary stamp tax prescribed in Section 196 of the Tax Code of 1997. (BIR Ruling No. 092-99 dated July 9, 1999) However, the notarial certification on the said deed is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the said Code. 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 should not apply. (BIR Ruling No. 092-99 dated July 8, 1989) 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. On the other hand, the surrender by the stockholder of his Verbuenco shares and the subsequent cancellation thereof is not subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997, since the surrender of the shares does not constitute a sale, assignment or transfer of said shares because Verbuenco is not taking title to the surrendered shares (BIR Ruling No. DA 114-02-21-00) Finally, since Verbuenco has ceased operations since year 2001 and the subject properties are no longer used in business and are not capital goods nor stock-in-trade, the transfer thereof to its stockholders in the form of liquidating dividends is not subject to value-added tax as prescribed in Section 106(B)(4) of the Tax Code of 1997. It bears emphasis, however, that before a corporation can finally liquidate and transfer properties to its stockholders, the corporation must secure a clearance from the BIR that it has no outstanding tax liabilities. ECSaAc 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