Valdez Anigan & Associates

December 19, 2007 BIR RULING [DA-667-07] 24 (D) (1); 64 (B); 73 (A) 270-91 Valdez Anigan & Associates Ermita, Manila Attention: Atty. Allene M. Anigan Gentlemen : This refers to your letter dated November 13, 2007 requesting, in behalf of your client, Tugatog Realty and Development Corporation (Tugatog), for exemption from capital gains tax, creditable withholding tax, documentary stamp tax and income tax, as a result of utilizing its properties to pay off (swap) the shares as liquidating dividends to retire the outstanding shares of the said corporation. It is represented that Tugatog is a domestic corporation whose corporate existence has been dissolved on September 3, 2003 as per Dissolution Certificate issued by the Securities and Exchange Commission (SEC); that in the process of liquidation and winding up its affairs, the corporation is now encountering difficulties in selling its properties to pay the remaining liabilities to its stockholders since it does not have fund or liquidity to do so; that the corporation is the absolute and registered owner of several parcels of land covered by several Transfer Certificates of Title with the different Registry of Deeds; that the following remaining properties of the corporation will be used as liquidating dividends to retire the outstanding shares of the corporation, as summarized below: ASSIGNED/ TCT NO/ ZONAL TRANSFERRED TO LOCATION AREA VALUATION STOCKHOLDERS T-258139(M) Bahay-Pare 72 1,000/s.m. Gerardo T. Lucas Meycauayan, Bulacan T-359311 Barandial Calamba, 160 2,500/s.m Ernesto T. Lucas Laguna (Residential) T-359310 Barandial Calamba, 160 2,500/s.m. Eduardo T. Lucas Laguna (Residential) T-359309 Barandial Calamba, 160 2,500/s.m. Edna T. Lucas Laguna (Residential) M-11939 Interior Res./Int. 142.75 1,900/s.m. Emmanuel T. Lucas Sanchez St., Tinejares, Malabon M-8587 Sisa St., Acacia, 300 2,800/s.m. Emmanuel T. Lucas Malabon, Metro Manila (Residential) M-8578 Sisa St., Acacia, 214.20 2,800/s.m. Gerardo T. Lucas Malabon, Metro Manila (Residential) M-10697 A. Consuelo St., 730 3,470/s.m. 1/3 each to Ernesto, Acacia, Malabon (Commercial) Eduardo, &b Edna Co M-8912 Sisa St., Acacia, 214.20 2,800/s.m. Emmanuel T. Lucas Malabon IDEHCa that based on the foregoing, the Deed of Transfer will be executed by Engr. Ernesto Lucas, President, in favor of the stockholders whereby the former shall assign and transfer the aforementioned properties in retirement of the shares of stock of said stockholder; that for the share of Ernesto Lucas, the corporate secretary, Eduardo Lucas shall execute in behalf of the company a Deed of Transfer; that as a consequence, the corporation will be able to liquidate and cancel the outstanding shares of stocks; and that in support of your request, you submitted the following documents: 1. SEC Registration and Articles of Incorporation; 2. Deed of Transfer; 3. Certified True Copies of Transfer Certificates of Title; 4. Certification by Corporate Secretary on the authorized capitalization and subscribed capital stock; 5. Certification as to the Historical cost of the properties transferred; 6. Other pertinent documents. In reply, please be informed that as follows: 1) Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations, as last amended by Revenue Regulations No. 2-98, implementing Section 64 (B) of the Tax Code of 1997, does not apply to transfers in complete liquidation where the assets of the liquidating corporation are transferred to its stockholders in exchange for the surrender of the latter's shares of stock for cancellation by the corporation. This conveyance is without consideration. The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered as a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. [ W. P. Fax & 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]. Hence, the transfer by AGPI of its assets, i. e., one (1) parcel of land, to its controlling stockholders by way of liquidating dividends is not subject to the expanded creditable withholding tax imposed under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, as last amended by Revenue Regulations No. 2-98 (BIR Ruling No. 059-90 dated April 17, 1990), and consequently, the same is not subject to the corporate income tax. 2) 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." Under the above-quoted Section 189 of Revenue Regulations No. 26, a conveyance distributing in liquidation the assets of a corporation consisting of real estate without consideration to the majority owner of its capital stock is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. Accordingly, the distribution in liquidation of the assets of Tugatog, consisting of the aforementioned parcels of land, to its stockholders, is not subject to the documentary stamp tax prescribed under Section 196 of the Tax Code of 1997. (BIR Ruling No. 059-90 dated April 17, 1990). TDCaSE However, the second paragraph of Section 73 (A) of the Tax Code of 1997 states: "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." Thus, in the event that the liquidating dividend in the form of properties is more than the amount/value off investment, the gain realized by the stockholders from the distribution of the assets in liquidation is subject to the normal tax in like manner as if they have sold their stock to third persons. ( Wise & Co. vs. Bibiano L. Meer , 078 Phil. 655, dated June 30, 1947) Nonetheless, this Office has held that the liquidating gain, which is the difference between the adjusted cost of the shares and the fair market value of the properties given as liquidating dividend is subject to the ordinary income tax rates and not to the capital gains tax on the sale of shares. (BIR Ruling No. 270-91 dated December 23, 1991) 3) The sale by the stockholders of Tugatog of the distributed asset received by them as return of investment immediately after title thereto is transferred to their names shall be subject to the final capital gains tax imposed under Section 24 (D) (1) of the Tax Code of 1997. (BIR Ruling No. 021-89 dated February 1991) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service