BIR Ruling [DA-496-04]

September 16, 2004 BIR RULING [DA-496-04] 27 (D) (5); 73; 196 #039-2002; DA-063-2004 Kasing Realty Corporation Magsaysay St., Alicia, Isabela Attention: Ms. Elizabeth K. Macabangun President Gentlemen : This refers to your letter dated October 14, 2003 which was indorsed by Revenue Region No. 3, Tuguegarao City, requesting for a ruling that the transfer of realty covered by Transfer Certificates of Title Nos. T-321105-A and T-321104 registered in the name of Kasing Realty and Development Corporation to its stockholders by way of liquidating dividends, as a consequence of the former's complete liquidation, is exempt from corporate income tax and to the creditable withholding tax, as well as to the documentary stamp tax. It appears from the documents submitted that Kasing Realty and Development Corporation is a domestic corporation duly registered with the Securities and Exchange Commission under SEC Certificate of Registration No. A200017314 dated November 16, 2000; that it has not commenced operation from December 1, 2003 up to the present; that on May 30, 2003, the Board of Directors of Kasing Realty and Development Corporation unanimously approved to dissolve the Corporation by shortening its corporate life effective June 1, 2003; and that as a result of the dissolution, the assets of the corporation consisting of one (1) parcel of land located at Alicia, Isabela, as aforementioned, will be returned to its stockholders by way of liquidating dividends. In reply, please be informed as follows: 1. The stockholders of Kasing Realty and Development Corporation shall realize capital gain or loss, as the case may be, when the latter distributes to the former its remaining asset (parcel of land) as liquidating dividends. Specifically, Section 73 of the Tax Code of 1997 provides as follows: "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 ." (Emphasis supplied) 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 dated November 11, 2002) 2. The conveyance of the parcel of land in the form of liquidating dividends is not subject to income tax, on the part of Kasing Realty and Development Corporation, either on its receipt of the surrendered shares, or its transfer of the aforesaid property to its stockholders. HcTEaA 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 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 stockholders pursuant to a complete or partial liquidation (BIR Ruling No. 171-92, supra ). Accordingly, Kasing Realty and Development Corporation is not liable for income tax on either the transfer of its assets to its stockholders, or on its receipt of the shares surrendered by the shareholders. 3. The conveyance of the parcel of land in the form of liquidating dividends is not subject to the documentary stamp tax (DST) on sale or transfer of real property imposed under Section 196 of the Tax Code of 1997. 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 and italics 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 remaining asset of Kasing Realty and Development Corporation to its controlling stockholders 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) 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 dated November 11, 2002) It goes without saying that before the corporation can formally distribute and return its properties to its stockholders, a clearance must be obtained from the BIR that it has no outstanding tax liabilities. CSaHDT 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