DMC Urban Property Developers, Inc.

December 16, 2009 BIR RULING [DA-(C-321) 788-09] 73 (A); Regs. No. 26; RR 6-2008; 028-2002; 270-1991; DA-164-2004; DA-(C-173) 452-09; DA-(C-186) 473-09 DMC Urban Property Developers, Inc. 2/F, 2281 Chino Roces Ave. (formerly Pasong Tamo Ext.) Makati City Attention: Mr. Joy B. Fajardo Accounting Officer Gentlemen : This refers to your letter dated August 28, 2009 stating that DMC Shipbuilders, Inc. (DMCSI) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 76117 dated October 12, 1977. DMCSI is engaged in the business of building and repair of ships, vessels, launches, tugs, barges, dredges, ferries, scaws, lighter and other floating or marine craft and equipment and was also organized to purchase, own, acquire, control, operate, build, maintain and/or repair piers, docks, dry docks, floating docks and slipways. DMCSI has no commercial operation since April 1, 2003. Per minutes of the meeting of DMCSI dated December 9, 2008, majority vote of the directors and the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock approved the amendment of the Articles of Incorporation by shortening of the term of its existence up to January 9, 2009. On June 9, 2009, SEC approved the shortening of the term of DMCSI's existence thereby dissolving the corporation. On August 27, 2009, a Deed of Conveyance was executed assigning, transferring and distributing the net corporate assets of the corporation consisting of three (3) parcels of land situated in Recodo, Zamboanga under Transfer Certificate of Title (TCT) No. T-89,863 consisting of Eleven Thousand Two Hundred Fifty Three (11,253) square meters, T-89,864 with an area of Twenty Seven Thousand One Hundred (27,117) * square meters and T-89,865 with Forty Six Thousand Two Hundred Sixty (46,260) square meters. On the basis of the foregoing, you now request for confirmation that: 1. DMCSI 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 (RR) No. 2-98, as amended, on the conveyance of parcels of land to its stockholders as liquidating dividends since the same is not considered a sale of real property. 2. DMCSI 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. The Deed of Conveyance to be executed between DMCSI and the stockholders is not subject to documentary stamp tax under Section 196 of the Tax Code of 1997, as amended, since the conveyance thereof is not considered a sale or disposition thereof and such conveyance is done without valuable consideration. SDHTEC 4. The conveyance by DMCSI 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. 5. The stockholders of DMCSI 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. 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; 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. 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 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: IaAHCE "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. (BIR Ruling No. 059-90 dated April 17, 1990). Since the conveyance by DMCSI 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. Moreover, Sec. 8 of 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. 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." TSIDEa 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 tax imposed under Section 27 of the 1997 Tax Code, as amended. Likewise, the sale by the stockholder/s of DMCSI 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 Sections 24 (D) (1) or 27 (D) (5) of the Tax Code of 1997, as the case may be. (BIR Ruling No. 021-89 dated February 1991) Finally, the capital gain so realized shall be subject to income tax at the rates prescribed under Section 27 of the Tax Code of 1997, as amended, and that pursuant to Section 39 (B) of the same Code, only 50% of the said 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. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service