Dipolog A.G. Lim Sons, Incorporated

December 22, 2009 BIR RULING [DA-(C-337) 818-09] 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 Dipolog A.G. Lim Sons, Incorporated Osmea St., Dipolog City Attention: Mr. Wilson T. Lim Vice-President and Gen. Manager Gentlemen : This refers to your letter dated November 17, 2008, as indorsed by the Regional Director, Revenue Region No. 15, Zamboanga City, requesting in effect for an exemption from taxes on the transfer of real properties by Dipolog A.G. Lim Sons, Incorporated (DAGLSI) as liquidating dividends to its individual stockholders. It appears that DAGLSI is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. DS-01956 dated June 9, 1989. DAGLSI after many years of existence has acquired the following real properties: 1.) A parcel of land situated at Galas, Dipolog City, identified as Lot 1615-C, Psd-168570, containing an area of ONE THOUSAND FIVE HUNDRED SIXTY FIVE (1,565) SQUARE METERS, more or less, which is covered by Transfer Certificate of Title (TCT) No. T-10733 of the Register of Deeds of Dipolog City; 2.) A parcel of land situated at Echavez Street, Dipolog City, identified as Lot 972-A, Psd-101934, containing an area of FOUR HUNDRED SIXTY EIGHT (468) SQUARE METERS, more or less, which is covered by TCT No. T-11775 of the Register of Deeds of Dipolog City; 3.) A parcel of land situated at Sergio Osmea Street, Dipolog City, identified as Lot 343, Dipolog Cadastre, containing an area of FOUR HUNDRED EIGHTY (480) SQUARE METERS, more or less, which is covered by TCT No. T-8787 of the Register of Deeds of Dipolog City, with its existing improvements; 4.) A parcel of land situated at Quezon cor. Mabini Sts., Dipolog City, identified as Lot 3, Pcs-12579, containing an area of THREE HUNDRED FIFTY TWO (352) SQUARE METERS, more or less, and covered by TCT No. T-11773 of the Register of Deeds of Dipolog City, with its existing improvements; AIaDcH 5.) A parcel of land situated at Rizal Ave. cor. Osmea St., Dipolog City, identified as Lot 2-A, Psd-09-0055485, containing an area of FIVE HUNDRED TWENTY FIVE (525) SQUARE METERS, more or less, which is covered by TCT No. T-11659 of the Register of Deeds of Dipolog City; 6.) A parcel land * situated at Rizal Ave., Dipolog City, identified as Lot 2-B, Psd-09-005485, containing an area of THREE HUNDRED THIRTY TWO (332) SQUARE METERS, more or less, which is covered by TCT No. T-12634 of the Register of Deeds of Dipolog City; Aside from the above-enumerated properties there is an existing cash in the hands of the Secretary-Treasurer in the amount of Six Million Two Hundred Thousand Pesos (P6,200,000.00), Philippine Currency, which has to be declared as liquidating cash dividends. DAGLSI will be voluntary dissolved effective at the close of business hours on July 28, 2008 and pursuant to Resolution No. 3 Series of 2008 and in compliance to a Deed of Transfer both dated July 28, 2008, there is a need of declaring dividends to individual stockholders of the corporation as follows: a) for Danny T. Lim, properties covered by TCTs T-10733, T-11775, T-11659 and T-12634; b) for Wilson T. Lim, properties as evidenced by TCTs T-8787 and T-11773; c) for Robert T. Lim cash amount of money in the total sum of Two Million Two Hundred Pesos (P2,200,000.00); * d) for Janice Lim-Ong cash amount of money in the total sum of Two Million Pesos (P2,000,000.00); and e) for Stephen T. Lim cash amount of money in the total sum of P2,000,000.00. 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: "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." SECATH 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 DAGLSI 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." 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 DAGLSI 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. SIHCDA 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