Balintawak Ice Plant and Cold Storage Corp.

September 26, 2007 BIR RULING [DA-512-07] 27 (D) (5); 73; 196 #039-2002; DA-063-2004; DA-496-2004 Balintawak Ice Plant and Cold Storage Corp. 1002 A. Bonifacio Avenue, Balintawak, Quezon City Attention: Mr. Manolo E. Roque President Gentlemen : This refers to your letter dated July 2, 2007 requesting for a ruling that the transfer of two (2) lots covered by Transfer Certificate of Title (TCT) No. 311611 by Balintawak Ice Plant and Cold Storage Corporation ("BIPCSC") to its majority stockholders by way of liquidating dividends, as a consequence of BIPCSC's complete liquidation, is exempt from corporate income tax and from the creditable withholding tax, as well as from the documentary stamp tax. TcDIEH It is represented that BIPCSC is a corporation duly registered with the Securities and Exchange Commission under SEC Certificate of Registration No. 119106 dated February 17, 1984; that after more than seven (7) years of non-operation the stockholders of BIPCSC decided to dissolve its company on March 30, 2007 and agreed to distribute the remaining assets, particularly Lot 31-B-16-A-1-B-1 (Psd-00-072388) and Lot 31-B-16-A-1-B-2 (Psd-00-072388) covered by TCT No. 311611 in favor of its majority stockholders, namely, Manuel E. Roque and Jaime E. Roque ("Stockholders"), respectively, by way of liquidating dividends; and that the SEC approved the said dissolution on June 15, 2007. In reply, please be informed as follows: 1. The Stockholders of BIPCSC shall realize capital gain or loss, as the case may be, when the latter distributes to the former its remaining asset (parcel of land consisting of two (2) lots) 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 proper. 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." [Underscoring ours] ScaHDT 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 BIPCSC, either on its receipt of the surrendered shares, or its transfer of time aforesaid property to its Stockholders. 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). AEDCHc 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, BIPCSC 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 subject 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. "(Underscoring 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 BIPCSC to its controlling stockholders (Manuel E. Roque and Jaime E. Roque) 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 cDICaS 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). 4. It goes without saying that before BIPCSC can formally distribute and return the two (2) lots covered by TCT No. 311611 in the form of liquidating dividends to its majority stockholders, namely, Manuel E. Roque and Jaime E. Roque, as a consequence of its complete dissolution, BIPCSC should be cleared from all its tax obligations and should comply with the provisions of Sections 47 (B) and 52 (C), both of the Tax Code of 1997, as amended, hence, a need to file a short-period return, among others. 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. THSaEC Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group