Centennial Savings Bank

May 8, 2009 BIR RULING [DA-(C-065) 224-09] Secs. 24; 25; 27; 28; 176; 196; BIR Ruling 039-02 Centennial Savings Bank 15/F Prestige Tower Emerald Avenue, Ortigas Center Pasig City Attention: MGen. Avelino L. Abiol (Ret.) President & CEO Gentlemen : This refers to your letter dated February 12, 2009 requesting for a ruling on the tax implications of the partial liquidation of Centennial Savings Bank. It is represented that Centennial Savings Bank (CSB, for brevity) is a corporation duly organized and existing under and by virtue of Philippines laws with principal office located at 15th Floor, Prestige Tower, Don Francisco Ortigas Jr. Road, Ortigas City. It is registered with the Securities and Exchange Commission as domestic thrift bank. On February 13, 1998, CSB was authorized by the Bangko Sentral ng Pilipinas to operate as thrift bank. CSB was established by the Armed Forces and Police Savings and Loan Association, Inc. (AFPSLAI), the AFP Retirement and Separation Benefits System (AFPRSBS) and the AFP Mutual Benefit Association, Inc. (AFPMBAI) to complement the products and services being offered by these corporations to their members and to present CSB as an alternative financial institution to the public. Shortly thereafter, the shares of AFPRSBS were absorbed by AFPSLAI and the latter became the majority stockholder of CSB. CSB has a total authorized capital stock of P1 Billion divided into 10,000,000 common shares at P100 par value for every share. Its outstanding capital consists of 8,960,110 common shares. As of December 31, 2008, 86% of the outstanding shares of CSB is owned by AFPSLAI and 14% is owned by AFPMBAI. In view of the continuing losses of the bank, the stockholders of CSB are contemplating to sell the bank to Sterling Bank of Asia under a "Clean Balance Sheet" basis. Under this arrangement, Sterling Bank of Asia will acquire selected assets and assume outstanding liabilities of the CSB, except those of AFPSLAI deposits. Upon approval of the sale by the BSP, the remaining assets which are not part of the "Clean Balance Sheet" will then be transferred by CSB to AFPSLAI to pay off the latter's deposits and the balance will be distributed to the stockholders as liquidating dividends. From the net book value of assets worth P774.240M, P538.385M representing AFPSLAI's deposits (net of the condoned amount of P235.835M) would be deducted, leaving a balance of P235.835M which shall be distributed to the stockholders of the bank as liquidating dividends. The assets to be distributed to the stockholders in the form of liquidating dividends in exchange of CSB shares are Real and Other Properties Acquired (ROPAs), condo units and parking lots located at the principal office of CSB, a listing of which is attached as Annex A and made an integral part of this ruling. DHcEAa Based on the foregoing, you now request for confirmation that the proposed partial liquidation of CSB shall have the following tax consequences: 1. CSB shall not be liable for income tax either for its receipt of the surrendered shares or its transfer of the Distributed Assets to the stockholders as liquidating dividends. 2. No documentary stamp tax under Section 176 of the Tax Code is due on the surrender by the stockholders of the CSB shares and the subsequent cancellation thereof. 3. The transfer by CSB to the stockholders of real property as liquidating dividend is not subject to documentary stamp tax on sale or transfer of real property under Section 196 of the Tax Code. 4. CSB's stockholders shall realize capital gain or loss when it surrenders its shares in CSB in exchange for the assets distributed by CSB as liquidating dividends, and such capital gain or loss shall be subject to the ordinary income tax rates provided under Sections 24 (A) (1) (c), 25 (A) (1), 27 (A) and (E), 28 (A) (1) and (2) and (B) (1) of the Tax Code 1997. In reply, please be informed that your opinion is hereby confirmed as follows: 1. CSB shall not be liable for income tax either for its receipt of the surrendered shares, or its transfer of the Distributed Assets to its stockholders as liquidating dividends. In BIR Ruling No. 171-92 dated May 28, 1992, as reiterated in BIR Ruling No. 039-2002 dated November 11, 2002, 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). 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 liquidation (BIR Ruling No. 171-92, supra). 2. No documentary stamp tax under Section 176 of the Tax Code is due on the surrender by the stockholders of the CSB shares and the subsequent cancellation thereof. The Tax Code of 1997 imposes a DST on the sale, assignment or transfer of shares of stock under Section 176 thereof, which in part reads: "Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfer of due-bills, certificates of obligations or shares or certificates of stock. On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligations, or shares or certificates of stock in any association, company or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such due-bills, certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificate of obligation or stock, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos (P200.00), or fractional part thereof, of the par value of such due-bill, certificate of obligation or stock. . . ." The surrender of the shares by CSB's stockholders does not constitute a sale, assignment or transfer because CSB is not taking title to the surrendered shares, and the shares are retired and not retained as treasury shares. Considering that CSB does not realize any benefit, as owner or otherwise, from its receipt of the shares, there is no basis to impose the DST on the transfer. 3. The transfer by CSB to its stockholders of real property as liquidating dividend is not subject to documentary stamp tax on sale or transfer of real property under Section 196 of the Tax Code of 1997. Section 189 of Revenue Regulation No. 26, otherwise known as the "Documentary Stamp Tax Regulations" provides, viz.: aSIDCT "SEC. 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 provision, a distribution in liquidation, without consideration, of the assets 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 assets of CSB consisting of ROPAs, condo units and parking lots (Annex A) to its stockholders, without monetary consideration, is not subject to DST as prescribed under Section 196 of the Tax Code of 1997. (BIR Ruling No. DA-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 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 shareholders 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 or deeds of assignment is subject to the documentary stamp tax of P15.00, pursuant to Section 188 of the Tax Code of 1997. 4. CSB's stockholders shall realize capital gain or loss when it surrenders its shares in CSB in exchange for the assets distributed by CSB as liquidating dividends, and such capital gain or loss shall be subject to the ordinary income tax rates provided under Sections 24 (A) (1) (c), 25 (A) (1), 27 (A) and (E), 28 (A) (1) and (2) and (B) (1) of the Tax Code 1997. In BIR Ruling No. 039-02, supra, this Office had occasion to rule that the tax treatment of liquidating dividends depends on the characterization of the income in the form of such dividends received by shareholders as a result of the dissolution of the corporation in which they hold shares. 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." In the case of Wise & Co., Inc., et al., vs. Bibiano L. Meer, Collector of Internal Revenue (78 Phil. 655 [1947]), the Supreme Court, in interpreting a similarly worded provision as above cited as in Section 25 (a) of Act No. 2833 ("Income Tax Law"), as amended by Section 4 of Act No. 3761 [which is partially lifted from Section 201 (c) of the US Revenue Act of 1918], adopted the judicial construction of the US Supreme Court in the case of Hellmich vs. Hellman (276 US 233), where it was held that the amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. The Supreme Court also stated that "(W)hen the corporation was dissolved and in the process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took place, which was no different in its essence from a sale of the same stock to a third party who paid therefor". In BIR Ruling No. 190-84 dated December 21, 1984, the issue raised was precisely whether the liquidating gain (that is, the difference between the fair market value of the properties received and the cost basis of the shares to the stockholders) derived by an individual stockholder is subject to the then 10%/20% tax rates under Section 34 (g) of the then Tax Code or to the graduated income tax rates under then Section 21 (b). This Office ruled that such gain should be subject to the tax rates under then Section 21 (b). The same conclusion was reached in other rulings of the BIR. (BIR Ruling Nos. 322-87 dated October 19, 1987; 136-88 dated April 12, 1988; 021-89 dated February 13, 1989; 270-91 dated December 23, 1991; DA-223-98). In effect, following the interpretation of these rulings, liquidating gain is to be treated as the gain from the sale or exchange of shares, consistent with the decision of the Supreme Court in Wise & Co., Inc., supra, subject, however, not to the 5%/10% final tax rate under Sections 24 (C), 25 (A) (3) or (B), 27 (D) (2), 28 (A) (7) (c) and (B) (5) (c) of the Tax Code of 1997, but to the ordinary income tax rates provided under Sections 24 (A) (1), 25 (A) (1) and (B) [that is, the 25% rate], 27 (A) or (E), 28 (A) (1) or (2) and (B) (1) of the Tax Code of 1997, depending on the status of the shareholder/stockholder (for instance, whether the shareholder is a corporation or an individual, resident or non-resident). 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 as represented are different, then this ruling shall be considered null and void. HCSEIT Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group