BIR Ruling [DA-521-04]

October 6, 2004 BIR RULING [DA-521-04] Secs. 24 (D); 73 (A); 039-02; DA-174-03 Twin Towers Labels, Inc. 38 Trinidad St. Victoria Village, East Canumay Valenzuela City Attention: Mr. Go Ton, Jr. President Gentlemen : This refers to your letter dated August 20, 2003 requesting for a ruling on the following: 1) Whether the corporation in transferring its remaining assets to its stockholders is subject to the corporate income tax and expanded withholding tax; 2) Whether the corporation is subject to the documentary stamp tax on the documents transferring the land to the controlling majority stockholders; and 3) Whether the stockholders who sell their distributed asset received by them as return of investment immediately after title thereto is transferred to their name is subject to the final capital gains tax imposed under Section 24(D)(1) of the Tax Code. It is represented that Twin Towers Labels, Inc. ("Twin Towers") is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Sixteen Million Five Hundred Sixty Thousand Pesos (P16,560,000.00), divided into 165,000 shares with a par value of One Hundred Pesos (P100.00) per share; that on August 8, 2003, the Board of Directors and stockholders of Twin Towers in a special meeting held at its main office unanimously approved to dissolve the corporation effective August 30, 2003; that as a result of the dissolution, the remaining assets of the corporation consisting of four (4) parcels of land, covered by Transfer Certificates of Title (TCT) No. 13815, 13816, V-20319, V-20320, V-20321, and V-20322, office and factory building covered by Tax Declaration (T/D) No. A-022 03835, residential house covered by T/D No. D-135-00834, delivery vehicle covered by Land Transportation Office (LTO) Registration No. 00545152, and machinery and equipment covered by T/D No. A-022 03834, will be distributed by the corporation to its stockholders, by way of liquidating dividends, as follows: i) Lot No. 11, Blk. WT-35 (TCT No. 13814), Lot No. 13, Blk. WT-35 (TCT No. 13815), Lot No. 5-A-1 (TCT No. V-20319), Lot No. 5-A-2 (TCT No. V-20320), Lot No. 5-A-3 (TCT No. V-20321), Lot No. 5-A-4 (TCT No. V-20322), office and factory building (T/D No. A-022 03835), residential house (T/D No. D-135-00834) and machinery and equipment (T/D No. A-022 03834) will be equally distributed to Mr. Tan Ding Gui and Go Ton, Jr. ii) Delivery vehicle (LTO Registration No. 00545152) will be equally distributed to Mr. Tan Ding Gui and Go Ton, Jr. and that Twin Towers has no liability of any kind. In reply thereto, please be informed that the above transfer of properties in favor of the stockholders of Twin Towers as liquidating dividends is not subject to the corporate income tax imposed under Section 27(A) or to the capital gains tax imposed under Section 27(D)(5) both of the Tax Code of 1997, as amended, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended. The transfer by the liquidating corporation of its assets to its stockholders is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in a partial or complete liquidation, and consequently, the liquidating corporation is not liable for income tax for said transaction. (BIR Ruling No. 039-02 dated November 11, 2002 cited in BIR Ruling No. DA-174-03 dated June 3, 2003) Anent the above, Section 73(A) of the Tax Code of 1997, as amended, provides in part, that "where a corporation distributes all its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is taxable income or deductible loss, as the case may be." In BIR Ruling No. 039-02 dated November 11, 2002, the Commissioner had ruled that the liquidating gain, i.e., the difference between the fair market value of the properties received vis--vis the cost basis of the shares to the stockholders, derived by an individual stockholder who is a citizen or a resident alien is subject to the ordinary income tax rates prescribed under Section 24(A)(1) of the Tax Code of 1997, as amended, or under Section 25(A)(1) and (B) thereof, in case of a nonresident alien individual. Accordingly, the gain, if any, derived by the stockholders of Twin Towers shall be subject to the regular income tax imposed under Section 24 of the Tax Code, as amended. On the other hand, pursuant to Section 189 of Revenue Regulations No. 26, otherwise, known as the "Documentary Stamp Tax Regulations," 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 this provision, a distribution in liquidation of the assets of a corporation consisting of real estate, without valuable consideration, is not subject to DST imposed, under Section 196 of the Tax Code of 1997, as amended. The distribution of the assets of the corporation to its stockholders in liquidation of the business without consideration is viewed as a return of capital to the shareholders. Considering this, the provision of Section 196 of the Tax Code of 1997, as amended, shall not apply. Thus, it has been held that a corporation that distributes its assets to its shareholders as liquidating dividends is not deemed to be selling 1 such assets to the latter. Accordingly, the transfer by Twin Towers of its above properties to the stockholders, in proportion to their respective shareholdings, shall not be subject to DST imposed under said Section 196 of the Tax Code, as amended. The notarial certification on the deeds of assignment is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Tax Code. Finally, the stockholders who sell the real property received by them as liquidating dividends immediately after title thereto is transferred to their name are subject to the final capital gains tax imposed under Section 24(D)(1) of the Tax Code, as amended, in the case of individual distributees and Section 27(D)(5) thereof, in the case of corporate distributees. It bears emphasis, however, that prior to dissolution, the Bureau must investigate and determine that Twin Towers has no outstanding tax obligation, and if it has, the same must be settled fully before it can dissolve and distribute its remaining assets to its stockholders. cSCADE 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group Footnotes 1. BIR Ruling No. 039-02, supra.