Peter Y. Alejado

December 28, 2007 BIR RULING [DA-691-07] 27 (D) (5); 73; 196 #039-2002; DA-063-2004; DA-496-2004; DA-512-2007 Peter Y. Alejado Suite 306 S. T. Condominium, Sta. Cruz, Manila S i r : This refers to your letter dated December 13, 2007 requesting for a ruling on the tax consequences on the transfer of a property by Ameto Development Corporation as liquidating dividends in your favor as a result of the dissolution of the corporation. It is represented that Ameto Development Corporation ("Ameto") is a domestic corporation duly registered with Securities and Exchange Commission (SEC) on July 28, 1988 with principal office located at 306 S. T. Condominium, 1480 Masangkay St., Sta. Cruz, Manila. Ameto Development Corporation's primary purpose as stated in its Articles of Incorporation is: It is primarily engaged in the business of manufacturing, re-cycling, fabrication, assembly, importing, exporting, buying, selling, distributing, marketing at wholesale and retail insofar as may be permitted by law, all kinds of goods, commodities, wares and merchandise of every kind such as plastic resins, plastic products, plastic foams, plastic hoses and tubings, perlite products and other goods of kindred nature, and any and all equipments, materials, supplies used or employed in or related to the manufacture of such finished products; to enter into all kinds of contracts for export, import, purchase, acquisition, sale at wholesale or retail and other disposition for its own account or principal or in representative capacity as manufacturer's representative, merchandise broker, indentor, commission merchant, factors or agents, upon consignment of all kinds of goods, wares, merchandise or products, whether natural or artificial. and that it is the absolute and registered owner of a condominium unit under Condominium Certificate of Title No. 8320 issued by the Registry of Deeds of Manila. In a Stockholders meeting held August 2, 2004, it was officially approved to shorten the corporate existence to August 31, 2004, thereby dissolving the corporation. In reply, please be informed as follows: 1. The stockholder of Ameto shall realize capital gain or loss, as the case may be, when the latter distributes to the former its remaining asset as liquidating dividends. Specifically, Section 73 of the Tax Code of 1997 provides as follows: IDaEHC "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 property. 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." [Emphasis supplied] 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 stockholder consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholder of his respective shareholding 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 condominium unit in the form of liquidating dividends is not subject to income tax, on the part of Ameto, either on its receipt of the surrendered shares, or its transfer of the aforesaid property to its sole stockholder. In BIR Ruling No. 171-92 dated May 28, 1992, this Office ruled that the transfer by the liquidating corporation of its remaining asset to its stockholder is not considered a sale of this asset. 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 stockholder pursuant to a complete or partial liquidation (BIR Ruling No. 171-92, supra ). Accordingly, Ameto is not liable for income tax on either the transfer of its asset to its stockholder, or on its receipt of the shares surrendered by the remaining shareholder. 3. The conveyance of the condominium unit 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. " (Emphasis supplied) Under the above-quoted provision, a distribution in liquidation, without consideration, of the asset 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 Ameto to its controlling stockholder 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) 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 asset to its sole stockholder as liquidating dividends is not deemed to be selling such asset 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) IaCHTS 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