Leyte Builders' Construction and Marketing Corporation

August 24, 2009 BIR RULING [DA-(C-186) 473-09] 73 (A); RR 6-2008; DA (C-088) 280-2008; 059-90; 092-99; 171-92; 039-02; 021-89; DA-164-2004 Leyte Builders' Construction and Marketing Corporation V. Mapa cor. Sen. Enage Sts. Tacloban City Attention: Mr. Jerry Ciacho Gentlemen : This refers to your letter dated April 7, 2009 requesting for a ruling pertaining to the tax implication of the transaction of Leyte Builders' Construction and Marketing Corporation (LBCMC) involving the conveyance of a corporate asset to the sole stockholder of the corporation as liquidating dividend, in complete liquidation. It appears that LBCMC is a domestic corporation registered with the Securities and Exchange Commission (SEC) under SEC No. 76907 dated December 12, 1977. LBCMC had ceased business operations since December 31, 1992 due to serious business losses and on August 11, 2003 the SEC thereafter revoked its Certificate of Registration for failure to comply with reportorial requirements. On January 16, 2008, the Bureau of Internal Revenue (BIR), Revenue Region No. 14, Tacloban City had issued Tax Clearance Certificate No. 10-2008, stating that LBCMC does not appear to have any outstanding nor pending internal revenue liability with its Office. All debts and liabilities of the corporation have been paid or discharged, and its liquidation will not affect the rights of any creditors whatsoever. LBCMC now intends to distribute its remaining asset, a parcel of agricultural land situated at Brgy. 79, Marasbaras, Tacloban City consisting of 8,285 square meters, more or less, and covered by Transfer Certificate of Title (TCT) No. T-20126 issued by the Registry of Deeds for the City of Tacloban to it sole stockholder, Mr. Jerry Ciacho, owner of the entire outstanding capital of the corporation. IHCESD In reply, please be informed as follows: 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 (RR) No. 1-90, as amended by RR 6-2001 and further amended by RR 17-2003. (BIR Ruling Nos. 059-90 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) In addition, Sec. 189 of Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations, provides: "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 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, as amended. Accordingly, the distribution in liquidation of the assets of a corporation to its stockholders is not subject to the documentary stamp tax prescribed under Section 196 of the Tax Code of 1997, as amended. (BIR Ruling No. 059-90 dated April 17, 1990). TcSICH Since the conveyance by LBCMC of its real property as liquidating dividends to its sole stockholder is without valuable consideration and was not made in the course of trade or business, the same is not subject to the 12% value-added tax (VAT) under Section 106 (A) of the Tax Code of 1997. Moreover, Sec. 8 of Revenue Regulations (RR) No. 6-2008 is quoted as follows: "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. EIAHcC 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." Also, in BIR Ruling No. 039-02 dated November 11, 2002, the Commissioner had ruled that the liquidating gain, i.e., the difference between the fair market value of the properties received vis--vis the cost basis of the shares to the stockholders, derived by an individual stockholder who is a citizen or a resident alien is subject to ordinary income tax rates prescribed under Section 24 (A) (1) of the Tax Code of 1997, as amended, or under Section 25 (A) (1) and B thereof, in case of a non-resident alien individual. Applying the foregoing, the gain, if any, derived by the stockholders shall be subject to the regular income imposed under Section 27 of the 1997 Tax Code. Likewise, the sale by the stockholder/s of LBCMC of the distributed asset received by him/them as return of investment immediately after title thereto is transferred to his/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 ascertained that the facts are different, then this ruling shall be considered as null and void. SCIAaT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service