Kapunan Lotilla Flores Garcia & Castillo

December 14, 2007 BIR RULING [DA-647-07] DA 063-04; DA 033-05 Kapunan Lotilla Flores Garcia & Castillo 16th Floor, Strata 2000 Building F. Ortigas, Jr. Road (formerly Emerald Avenue) Ortigas Center, Pasig City Attention: Atty. Lorna Patajo-Kapunan Gentlemen : This refers to your letter dated June 27, 2007 stating that your client, Lorca Holdings, Inc. [formerly Benicon, Inc. and Kaleya Realty Corporation] (Corporation), is a holding company organized under the laws of the Philippines and currently in the process of corporate dissolution; that the owner, registered majority stockholder, Chairman of the Board and President of the Corporation used to be the late Benigno P. Toda, Jr. (Mr. Toda); that the Corporation owns one (1) real estate property located at 2286 Magnolia Street, Dasmarias Village, Makati City (Property) and covered by TCT No. 131040; that upon Mr. Toda's death on January 16, 1994, estate proceedings for the settlement of his estate were commenced in the Regional Trial Court of Makati (RTC-Makati), entitled " In Re: Estate of Benigno P. Toda, Jr., vs. Benigno P. Toda III, et al .," docketed as SP. PROC. No. M-3792; that to settle the estate of Mr. Toda (the Estate), the RTC-Makati promulgated the Orders dated May 9, 2003 and May 29, 2003 (collectively referred to as the Orders), which awarded ownership of the Property of the Corporation to Mr. Toda's surviving spouse, Ms. Conchita Simo-Toda (Ms. Toda); that to execute the Orders, all the shares of stock of the Corporation registered in the name of Mr. Toda were transferred to Ms. Toda; that the administrator of the Estate fulfilled their obligation to pay the estate taxes, including the taxes due on the transfer of the shares of stock of the Corporation to Ms. Toda; that the Honorable Court issued the appropriate clearance in this connection; that as such, the heirs of Mr. Toda were able to register the properties they inherited in their respective names; that the BIR, however, sent the Estate a Notice of Assessment dated January 9, 1995, claiming from the latter Mr. Toda's alleged deficiency income taxes on a certain transaction, in the total amount of P79,099,999.22; that the Estate protested the said assessment; that on September 14, 2004, the Supreme Court promulgated a Decision, finding the BIR's claim against the Estate as proper and allowable; that the Decision became final and executory on March 3, 2005; that on December 22, 2006, the heirs of Mr. Toda filed with the BIR an Application For Abatement Program under Revenue Regulations No. 15-2006; that in the said Application, the heirs of Mr. Toda committed to pay the following amounts in settlement of the BIR's claim against the Estate: (1) the amount of P15,000,000.00 to be paid by December 22, 2006; (2) the amount of P29,295,995.64 to be paid by December 29, 2006; and (3) the amount of P44,295,995.63 to be paid by January 31, 2007; that the above-stated amounts have since been paid in full settlement of the deficiency income taxes due from the Estate; that on March 20, 2007, the BIR, through Assistant Commissioner James H. Roldan of the Legal Service, issued a Certification, attesting to the full settlement of the deficiency income taxes due from the Estate; that at present, the Corporation's stockholders and their respective holdings are as follows: CEDScA Stockholder Shares Par Value Shares (in Php) Ms. Conchita Simo-Toda 122,996 100.00 P12,299,600.00 Mr. Jose Mari Sumo 1 100.00 100.00 (In Trust for Ms. Toda) Ms. Pilar S. 1 100.00 100.00 Zimonyi (In Trust for Ms. Toda) Atty. Lorna Patajo- 1 100.00 100.00 Kapunan (In Trust for Ms. Toda) Atty. Irene Joy 1 100.00 100.00 Besido-Garcia (In Trust for Ms. Toda) Ms. Deanna Martelino 1,000 100.00 100,000.00 Ms. Milagros Santos 1,000 100.00 100,000.00 Total 125,000 P12,500,000.00 =========== that as may be gleaned from the foregoing, with the death of Mr. Toda, Ms. Toda became the signatory and controlling stockholder of the Corporation to the extent of 98.40%; that since 1988, the Corporation has not been engaged in operations; that however, ordinary expenses to maintain its land and building are, to date, still being incurred by the Corporation; that considering that the Corporation has not been in actual operations since 1988 and given that it is, indeed, a mere holding company, the present stockholders resolved to amend the Corporation's Articles of Incorporation to reflect the true nature of its operations; that the Securities and Exchange Commission (SEC) approved the change of the Corporation's primary purpose as well as its corporate name on April 11, 2007; that in view of the Corporation's non-operation for a period of about nineteen (19) years, the Corporation's latest Audited Financial Statements reflected a substantial Cumulative Deficit of P44,044,173.00 caused largely by the Corporation's fixed ordinary expenses; that the Corporation's dire financial condition and increasing cumulative deficit prompted the present stockholders to decide on dissolving the Corporation by amending its Articles of Incorporation in order to shorten its corporate term; that once the corporate dissolution is legally affirmed, the Corporation will then settle its existing liabilities, which primarily consist of advances from one of its stockholders, Ms. Toda, in the amount of P35,940,239.00; that such amount represents the sum of money advanced by Ms. Toda over the years, for the payment of the Corporation's ordinary expenses; that thereafter, the Corporation shall distribute its remaining assets to its stockholders; that after the settlement of the advances from Ms. Toda, the Corporation's net assets will amount of P14,885,594.00, computed as follows: ASSETS Property and Equipment, net 49,512,306.00 Accounts Receivables Others 1,243,219.00 Other Assets 70,308.00 Total Assets 50,825,833.00 Less: Payment of All Advances Received 35,940,239.00 from Ms. Toda NET ASSETS AVAILABLE FOR 14,885,594.00 DISTRIBUTION =========== that after the payment of all the advances received by the Corporation from Ms. Toda, the amounts that each stockholder shall receive, and the gain that they will derive by virtue of the corporate liquidation, are as follows: Stockholder Shares Shares (in Share in Net Gain derived Php) Assets from the Excess of the Liquidating Dividends from their Capital Contribution Ms. Toda 122,996 12,299,600.00 14,646,363.68 2,346,763.68 Ms. Simo 1 100.00 119.08 19.08 (In Trust for Ms. Toda) Ms. Zimonyi 1 100.00 119.08 19.08 In Trust for Ms. Toda) Atty. Kapunan 1 100.00 119.08 19.08 (In Trust for Ms. Toda) Atty. Besido-Garcia 1 100.00 119.08 19.08 (In Trust for Ms. Toda) Ms. Martelino 1,000 100,000.00 119,080.00 19,080.00 Ms. Santos 1,000 100,000.00 119,080.00 19,080.00 TOTAL 125,000 12,500,000.00 14,855,594.00 2,385,594.00 ====== ========== ========== ========== Based on the foregoing representations, you now request confirmation of your opinion that 1. The liquidating dividends received by the Corporation's stockholders as a result of the Corporation's dissolution shall be treated as payments in exchange for stock or share, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits based on the scheduler normal income tax rate of 5-32%; 2. In determining the gain or profit realized from the dissolution of the Corporation and distribution of the liquidating dividends, the same must be based on the difference between the fair market value of the assets received vis--vis the adjusted cost to the stockholders of their respective shares; 3. The act of the Corporation in distributing its assets to its shareholders as a liquidating dividend is not deemed a sale, but is merely a return of the stockholder's capital, the conveyance by the Corporation of its real properties to its stockholders, to the extent that the conveyance represents the return of the stockholder's investments, will not subject the stockholders to any income tax. Conversely, the Corporation will not be subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a plan of liquidation; 4. The distribution of the Corporation's real property to the stockholders as liquidating dividends is not subject to documentary stamp tax. However, the notarial certification on the said deed is subject to the documentary stamp tax of P15.00; and 5. The documentary stamp tax on the conveyance of the Corporation's real property to the stockholders as liquidating dividends will be due within five (5) days after the close of the month when the SEC issues the Final Order of Dissolution. aCIHAD In reply thereto, please be informed that this Office had already occasion to rule on the matter, when it said in BIR Ruling No. DA063-04 dated February 12, 2004 , that ". . . the transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale of these assets to its stockholders. 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 redemption. (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. . . . ". . . Neither would the conveyance by . . . of its real properties to its stockholders to the extent that such transfer represents the return of the stockholders' investments in the said corporation, be subject to any income tax and consequently, to the creditable withholding tax of 6% imposed under Section 3(J) of Revenue Regulations No. 6-2001, as amended by Revenue Regulations No. 12-2001, implementing Section 57(B) of the Tax Code of 1997. . . . xxx xxx xxx ". . . a conveyance distributing the assets of a corporation consisting of real properties without consideration to a owner of its capital stock is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. . . . 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. SHECcD xxx xxx xxx" IN VIEW OF THE FOREGOING, since the above-cited ruling is in all fours similar to the instant case, this Office hereby confirms your opinion that 1. The liquidating dividends received by the Corporation's stockholders as a result of the Corporation's dissolution shall be treated as payments in exchange for stock or share, and any gain or profit realized thereby shall be taxed to the distribute as other gains or profits based on the scheduler normal income tax rate of 5-32%. 2. In determining the gain or profit realized from the dissolution of the Corporation and distribution of the liquidating dividends, the same must be based on the difference between the fair market value of the assets received vis--vis the adjusted cost to the stockholders of their respective shares. 3. The act of the Corporation in distributing its assets to its shareholders as a liquidating dividend is not deemed a sale, but is merely a return of the stockholder's capital, the conveyance by the Corporation of its real properties to its stockholders, to the extent that the conveyance represents the return of the stockholders' investments, will not subject the stockholders to any income tax. Conversely, the Corporation will not be subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a plan of liquidation. 4. Moreover, the conveyance of real estate by a corporation without valuable consideration to an owner of all its capital stock in consonance of its dissolution is not subject to tax. Accordingly, the distribution of the Corporation's real property to the stockholders as liquidating dividends is not subject to documentary stamp tax. However, the notarial certification on the said deed is subject to documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. 5. Finally, the documentary stamp tax on the conveyance of the Corporation's real property to the stockholders as liquidating dividends will be due within five (5) days after the close of the month when the SEC issues the Final Order of Dissolution. cETCID 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service