Santiago & Santiago Law Offices

November 27, 2009 BIR RULING [DA-(C-291) 716-09] Secs. 24; 25; 27; 28; 106, 175; 196; BIR Ruling 039-02; DA-353-03; DA-521-04; DA-581-04; DA-501-05; DA-384-07 Santiago & Santiago Law Offices Ground Floor, Ortigas Building Ortigas Avenue cor MERALCO Avenue 1605 Pasig City Attention: Atty. Manuel C. Carlos Gentlemen : This refers to your letter dated October 8, 2009 requesting, on behalf of your client, Railco Investments, Inc. (RAILCO), confirmation of your opinion that the transfer of its properties to its stockholders in the form of liquidating dividends is not subject to income, capital gains, withholding, documentary stamp and value added taxes. It is represented that RAILCO is a domestic corporation organized under and by virtue of the laws of the Republic of the Philippines with Securities and Exchange Commission ("SEC") Registration No. A200014914. RAILCO has an authorized capital stock of Three Hundred Million Pesos (P300,000,000.00) divided into three million (3,000,000) shares with a par value of One Hundred Pesos (P100.00) per share. RAILCO was organized as a holding company and did not engage in the real estate business. On 02 August 2006, the SEC issued an order revoking the Certificate of Incorporation/Registration of RAILCO. The stockholders of RAILCO decided to abide by the decision of the SEC by accepting the revocation of the registration of RAILCO and liquidating the corporation. As of date, RAILCO does not have any existing liabilities. The remaining assets of RAILCO consist of (i) several parcels of land, (ii) shares of stock in Metro Rail Transit Holdings, Inc., Monumento Rail Transit Corporation and MRT Development Corporation, and (iii) various accounts receivables, the details of which are listed in a schedule attached as Annex "A" and made an integral part hereof. As one of the final stages in the winding up of the affairs of RAILCO, the stockholders of RAILCO agreed to distribute the above-mentioned assets of RAILCO to its stockholders as liquidating dividends in proportion to their respective shareholdings, as indicated in Annex "A". EIAaDC In reply, please be informed as follows: 1. RAILCO shall not be liable for income tax either for its receipt of the surrendered shares or its transfer of the subject property 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) . Hence, the transfer by RAILCO of its assets to its stockholders is not considered a sale of these assets. Thus, RAILCO does not realize gain or loss in a partial or complete liquidation, and consequently, RAILCO is not liable for income tax for said transaction, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended. (BIR Ruling No. DA 521-04 dated October 6, 2004) . 2. The stockholders of RAILCO shall realize capital gain or loss when they surrender their shares in RAILCO in exchange for the property distributed by the latter 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". IDSaAH 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). 3. The transfer by RAILCO to its stockholders of the subject property as liquidating dividends is not subject to documentary stamp tax (DST) on the 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. : "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 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 subject property by Railco 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 the deed of assignment is subject to the DST of P15.00, pursuant to Section 188 of the Tax Code of 1997. DHCcST 4. No DST under Section 175 of the Tax Code is due on the surrender by the stockholders of the Railco 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 175 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. . . ." 5. Finally, since RAILCO is not engaged in real estate business and from the time it was organized, did not do any business and subsequently its Certificate of Incorporation was cancelled and revoked by the SEC, the transfer of the above-described properties in the form of liquidating dividends to its stockholders is not subject to value-added tax prescribed in Section 106 (B) (4) of the Tax Code of 1997. (BIR Ruling No. DA353-03 dated October 10, 2003) 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service ANNEX A SCHEDULE OF RAILCO PROPERTIES I. Real Properties Blk. Lot Area TCT No. Location No. No. (sqm.) 253849 Palawan cor. Luzon Avenue 5-A 17 187.5 253850 D. Santiago cor. Luzon 5-T 1 253.8 253851 D. Santiago St. 5-T 2 218.1 253852 D. Santiago St. 5-T 3 231.1 253879 D. Santiago corner Visayan Avenue 5-U 1 152.6 253880 Visayan Avenue 5-U 3 200.8 251873 D. Santiago St. 5-JJ 1 226.0 251873 D. Santiago St. 5-JJ 2 172.3 253918 Lardizabal St. 15 18 203.3 253919 Lardizabal St. 15 19 279.8 253920 Lardizabal St. 15 23 302.0 253921 Lardizabal St. 15 24 111.8 253922 Legarda Street 15 25 659.1 253923 Lardizabal St. 15 26 204.2 253924 Lardizabal St. 15 27 213.4 253941 Ma. Cristina St. 28 22 180.0 253942 Ma. Cristina St. 28 23 180.0 253943 M. de la Fuente St. 28 29 180.0 253944 M. de la Fuente St. 28 30 180.0 253945 M. de la Fuente St. 28 31 180.0 251880 Ma. Cristina St. 28 24 180.0 253898 Don. Quijote St. 28 4 180.0 253901 Ma. Cristina St. 28 11 173.7 251876 Gen. Geronimo St. 54 8 747.5 251877 Gen. Geronimo St. 54 9 754.6 251878 Gen. Geronimo St. 54 10 781.4 253903 M. de la Fuente St. cor. Amelia 30 1 209.1 253904 M. dela Fuente St. 30 2 218.0 253905 M. dela Fuente St. 30 3 299.2 253906 Amelia St. 30 47 232.4 253907 Amelia St. 30 48 220.1 253908 Amelia St. 30 49 182.7 253909 Gen. Geronimo St. 30 50 567.7 253910 Gen. Geronimo St. 30 51 455.2 253911 Amelia St. 30 52 461.3 253912 Amelia St. 30 53 234.9 253913 Gen. Geronimo St. 30 54 556.4 253914 Amelia St. 30 55 245.7 253915 Gen. Geronimo St. 30 143 311.6 253916 Gen. Geronimo St. 30 144 415.8 253917 Gen. Geronimo St. 30 145 364.1 253933 M. dela Fuente St. 29 14 180.0 253934 M. dela Fuente St. 29 15 180.0 253935 M. dela Fuente St. 29 16 180.0 253936 M. dela Fuente cor. Verdad 29 17 279.8 251882 Geronimo Street 54 6 627.7 251882 Geronimo Street 54 7 821.2 159710 Ma. Luisa Park, Cebu 2 3-B 5,940 159711 Ma. Luisa Park, Cebu 22 4,196 159709 Ma. Luisa Park, Cebu 21 4,422 II. Personal Properties SHARES OF STOCK IN MRT HOLDINGS, INC. SHARES OF STOCK IN MONUMENTO RAIL TRANSIT CORPORATION SHARES OF STOCK IN MRT DEVELOPMENT CORPORATION III. Others ACCOUNTS RECEIVABLES FROM AFFILIATES P1,051,661,010.00