Jakmire Realty Development Corporation

August 6, 2008 BIR RULING [DA-(C-028) 115-08] Sec. 24 (D); 27 (D) (5); DA084-05 Jakmire Realty Development Corporation 347 Gil Puyat Avenue Makati City Attention: Ms. Jocelyn L. Jao President Gentlemen : This refers to your letter dated April 23, 2008 stating that Jakmire Realty Development Corporation (Jakmire) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) on January 25, 1993; that Jakmire is the absolute and registered owner of a parcel of land covered by TCT No. 183660 issued by the Registry of Deeds for Makati City with an aggregate area of 1,000 square meters; that Jakmire is primarily organized to acquire by purchase, lease, donation or otherwise, and to own, use, improve, develop, subdivide, sell, mortgage, exchange, lease, develop and hold for investment or otherwise, real estate of all kinds, whether improve, and other structures of whatever kind, together with their appurtenances; that Jakmire from the time of its registration with the SEC has never operated as a corporation for reasons beyond the control of the stockholders and none of its stockholders wanted to pursue anymore the business for which it was formed; that on November 3, 2003, the SEC has revoked the Certificate of Registration of Jakmire for failure to comply with the reportorial requirements; that in a special stockholders meeting held on November 4, 2003, it was officially resolved that it will formally terminate its corporate life as of the date of its registration was revoked by the SEC; and that Jakmire by virtue of the Board Resolution will now distribute the said property to its stockholders as liquidating dividends as one of the final stages in the winding up of its affairs. cCSDaI Based on the foregoing representations, you now request confirmation on the tax consequences of the transfer of a parcel of land by Jakmire to its stockholders in the form of liquidating dividends. In reply thereto, please be informed as follows: 1. The stockholders of Jakmire shall realize capital gain or loss, as the case may be, when the latter distributes to the former its remaining asset (parcel of land) as liquidating dividends. Specifically, Section 73 of the Tax Code of 1997 provides as follows: "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 ours) acEHSI 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. Thus, Section 8 of Revenue Regulations No. 6-2008 provides that 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. Accordingly, the gain, if any, derived by the individual stockholders consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings in the corporation (Section 66 (a): Section 256 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations) shall be subject to the regular income tax rates provided under Section 24 (A) (1) (c) of the Tax Code of 1997, as implemented by Revenue Regulations No. 6-2008. ISCTcH 2. The conveyance of the above-mentioned parcel of land in the form of liquidating dividends is not subject to income tax, on the part of Jakmire, either on its receipt of the surrendered shares, or its transfer of the aforesaid property to its stockholders. In BIR Ruling No. 171-92 dated May 28, 1992, this Office ruled that the transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale of these assets. 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) AEIcTD Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its stockholders pursuant to a complete or partial liquidation (BIR Ruling No. 171-92, supra). Accordingly, Jakmire is not liable for income tax on either the transfer of its assets to its stockholders, or on its receipt of the shares surrendered by the shareholders. 3. The conveyance of the parcel of land in the form of liquidating dividends is not subject to the documentary stamp tax on sale or transfer of real property imposed under Section 196 of the Tax Code of 1997. This is because Section 189 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations" provides that "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." HEacDA Under the above-quoted provision, a distribution in liquidation, without consideration, of the assets of a corporation consisting of parcels of land is not subject to DST imposed under Section 196 of the Tax Code of 1997. Accordingly, the distribution of the remaining asset of Jakmire to its controlling stockholders 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 assets to its stockholders as liquidating dividends is not deemed to be selling such assets 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) cEITCA It goes without saying that before the corporation can formally distribute and return its property to its stockholders, a clearance must be obtained from the BIR that it has no outstanding tax liabilities. 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