Garcia Pangilinan and Company

July 11, 2008 BIR RULING [DA-(C-006) 028-08] 64 (B), 196, 24 (D) (1); DA-092-09 7/08/99 Garcia Pangilinan and Company 3-1 Edificio Enriqueta Corner Amoranto & D. Tuason Streets Sta. Mesa Heights, Quezon City Attention: Mr. Arcadio R. Garcia Gentlemen : This refers to your letter May 12, 2008 requesting confirmation, on behalf of your client Antonio Tuason, Inc. (ATI), on the following: 1. That ATI is not subject to income tax under Section 27 (A) nor to the capital gains tax imposed under Section 27 (D) (5) both of the Tax Code of 1997, and consequently to the withholding tax imposed by Revenue Regulations No. 2-98, as amended, on the conveyance of a parcel of land and a condominium unit to its stockholders as liquidating dividends since the same is not considered a sale of real property; aDcTHE 2. That ATI is not liable to income tax on its receipt of the shares surrendered by the stockholders since it is in pursuance to its plan of liquidation; 3. That the Deed of Conveyance to be executed between ATI and the stockholders is not subject to documentary stamp tax under Section 196 of the Tax Code of 1977, as amended, since the conveyance thereof is not considered a sale or disposition thereof and such conveyance is done without valuable consideration; DTcHaA 4. That the conveyance by ATI of its real properties as liquidating dividends to its stockholders without valuable consideration is not subject to 12% value added tax imposed under Section 106 (A) of the Tax Code of 1997, as amended, since the transfer of said properties was not made in the course of trade or business (BIR Ruling No. DA-164-2004 dated April 5, 2004), neither was it deemed sale considering that it was a mere return of the stockholder's capital; 5. That the stockholders of ATI may realize capital gain or loss on their receipt of liquidating dividends from the dissolving corporation; and that said 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 on the corporation; HDIaST 6. That the capital gain so realized shall be subject to income tax at the rates prescribed under Section 27 of the Tax Code of 1997; and that pursuant to Section 39 (B) of the same Code, only 50% of the aforementioned capital gain is reportable for income tax purposes if the shares were held by the individual stockholders for more than 12 months and 100% of the capital gain if the shares were held by the individual stockholders for not more than 12 months. (BIR Ruling Nos. 028-2002 and 270-1991); 7. That should the stockholders sell the above-mentioned real properties received by them as liquidating dividends immediately after titles thereto are transferred to their names, the stockholders shall be subject to 6% capital gains tax based on the gross selling price thereof, or the fair market value prevailing at the time of sale whichever is higher pursuant to Section 24 (D) (1) of the Tax Code of 1997; and that the sale shall also be subject to documentary stamp tax under Section 196 of the same Code. ASTIED It is represented that ATI is a domestic corporation duly registered with the Securities and Exchange on January 15, 1958 under SEC Registration No. 13468; that the term of its corporate life is fifty years; that same expired on January 15, 2008; that in the letter of ATI to the SEC dated January 7, 2008, the Commission was duly notified of the said expiration of corporate life and also of the lack of interest on the part of the stockholders to extend the life of the corporation; that the SEC acknowledged receipt of ATI's letter in its letter-reply dated January 18, 2008 stating therein that ATI may proceed with the liquidation and winding up to its affairs without intervention of the Commission; that as of the date of declaration of liquidating dividends on April 28, 2008, the stockholders of the corporation and their respective holdings are as follows: Stockholders No. of Shares % of Ownership Consuelo Angela de la Vega 12,652 33.3307 Benigno Antonio de la Vega 12,652 33.3307 Susana Katrina de la Vega 12,651 33.3286 Pilar Gonzalez 1 00.0025 Benigno de la Vega 1 00.0025 Nieves Ong 1 00.0025 Gerardo Papa 1 00.0025 Total 37,959 100.0000 ====== ====== that the shares issued in the name of Pilar Gonzalez, Benigno de la Vega, Nieves Ong and Gerardo Papa collectively representing 0.01% of the total issued and outstanding capital stock of ATI, are qualifying shares held by them in-trust for the aforementioned three major stockholders in equal proportion; and that in view of the aforementioned facts and circumstances, the Board of Directors of the corporation approved a resolution conveying its real properties, without consideration, in the form of liquidating dividends to its stockholders in its meeting held on March 31, 2008. CcSEIH In reply, please be informed as follows: 1 & 2. The transfer by the liquidating corporation of its remaining assets to its stockholders in exchange for the surrender and cancellation of the shares is not a sale, hence the same is exempt from corporate income taxes, creditable withholding and documentary stamp taxes under Revenue Regulations No. 1-90, as amended by RR 6-2001 and further amended by RR 17-2003. (BIR Ruling Nos. 059 dated April 17, 1990 and 092-99 dated July 8, 1999) Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. ( W.P. Fox & Sons, Inc., Petitioner vs. Commissioner of Internal Revenue, Respondent, 15 BTA 115; Jordan Petroleum Company, 13AFTR 2d 1692 (227 F. Supp. 174); JTS Brown & Son Company vs. Commissioner of Internal Revenue, 10TC 840) 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) 3. Section 189 of Revenue Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations provides, viz. : EIAaDC "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 ATI, consisting of one (1) parcel of land and a condominium unit, 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). DHTCaI 4. Since the conveyance by ATI of its real properties as liquidating dividends to its stockholders is without valuable consideration and was not made in the course of trade or business, the same is not subject to the 12% VAT under Section 106 (A) of the Tax Code of 1997. 5. Section 8 of Revenue Regulations No. 6-2008 provides viz. : "SEC. 8. Taxation of Surrender of Shares by the Investor Upon Dissolution of the Corporation and Liquidation of Assets and Liabilities of said Corporation. "Upon surrender by the investor of the shares in exchange for cash and property distributed by the issuing corporation upon its dissolution and liquidation of all assets and liabilities, the investor shall recognize either capital gain or capital loss upon such surrender of shares computed by comparing the cash and fair market value of property received against the cost of the investment in shares. The difference between the sum of the cash and the fair market value of property received and the cost of the investment in shares shall represent the capital gain or capital loss from the investment, whichever is applicable. If the investor is an individual, the rule on holding period shall apply and the percentage of taxable capital gain or deductible capital loss shall depend on the number of months or years the shares are held by the investor. Section 39 of the Tax Code, as amended, shall herein apply in all possible situations. DcaECT The capital gain or loss derived therefrom shall be subject to the regular income tax rates imposed under the Tax Code, as amended, on individual taxpayers or to the corporate income tax rate, in case of corporations." 6. The capital gain so realized shall be subject to income tax at the rates prescribed under Section 27 of the Tax Code of 1997. Hence, only 50% of the aforementioned capital gain is reportable for income tax purposes if the shares were held by the individual stockholders for more than 12 months and 100% of the capital gain if the shares were held for not more than 12 months pursuant to Section 39 of the same Tax Code. (BIR Ruling No. 028-2002 and 270-1991) SDHTEC 7. The sale by the stockholders of ATI 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