BIR Ruling [DA-581-04]

November 12, 2004 BIR RULING [DA-581-04] Secs. 24 (D), 73 (A); 039-02; DA-521-04 Tanjuatco & Partners 11/F, Taipan Place Building Emerald Avenue, Ortigas Center Pasig City Attention: Atty. Emigdio S. Tanjuatco, Jr. Gentlemen : This refers to your letter dated October 4, 2004 requesting in behalf of your client, Vonnel Industrial Park, Inc.,for a ruling on the tax implications of the transfer of its properties to its stockholders in the form of liquidating dividends. It is represented that Vonnel Industrial Park, Inc. is a domestic corporation registered with the Securities and Exchange Commission (SEC) on October 29, 1976 under Registration No. 70399; that it acquired a tract of land as payment for the initial subscription to its capital stock at the time of its organization; that from the time it was organized in 1976, up to the present, it did not transact any business, except the obtaining of a loan utilizing the mentioned tract of land as security; that the said loan had been paid and the mortgage was cancelled; that on August 11, 2003, the SEC cancelled and/or revoked the Certificate of Incorporation of Vonnel Industrial Park, Inc. for failure to operate since the time of its inception in 1976 up to the date of the revocation of its registration; that its stockholders decided to abide by the decision of the SEC by accepting the revocation and have decided to liquidate the corporation; that Vonnel Industrial Park, Inc. has no existing liabilities and had only one asset which is the above-mentioned tract of land; and that the corporation will distribute the tract of land to its stockholders as liquidating dividends as one of the final stages in the winding up of its affairs. In reply thereto, please be informed that the above transfer of properties in favor of the stockholders of Vonnel Industrial Park, Inc. 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-521-04 dated October 6, 2004) 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 Vonnel Industrial Park, Inc. 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 Vonnel Industrial Park, Inc. 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 transfer/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. DEICaA It bears emphasis, however, that prior to dissolution, the Bureau must investigate and determine that Vonnel Industrial Park, Inc. has no outstanding tax obligation, and if it has, the same must be settled fully before it can dissolve and distribute its assets to its stockholders. 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