Nitura Malabanan Lagunilla Mendoza & Gaddi Attorneys-at-Law

November 7, 2008 BIR RULING [DA-(I-036) 395-08] Secs. 64 (B), 196, & 24 (D) (1); DA(C-006)-028-2008 Nitura Malabanan Lagunilla Mendoza & Gaddi Attorneys-at-Law 16/F BDO Plaza, 8737 Paseo de Roxas 1226 Makati City Attention: Mario C. Lorenzo Legal Counsel Gentlemen : This refers to your letter dated October 7, 2008, in behalf of your client, Luz P. Maosca, with business address at #2 Roosevelt St., Greenhills, San Juan, Metro Manila, requesting a confirmatory ruling of your opinion that the transfer of LPM's industrial lot back to Maosca upon the dissolution of LPM is not subject to withholding, capital gains and documentary stamp taxes, inasmuch as the transaction is essentially a return of capital and not a conveyance for a valuable consideration. HAaECD It is represented that Maosca used to own an industrial lot registered in her name under Transfer Certificate of Title No. 8256-R of the Registry of Deeds of San Juan, Metro Manila; that on May 3, 2000, Maosca and LPM Holdings, Inc. (LPM), entered into a tax-free exchange transaction whereby she conveyed to LPM her aforesaid industrial lot, together with the factory building standing on said lot (the "Properties"), in exchange for 231,092 shares of LPM which represents 99.99% of its entire capital stock. This property for share swap was embodied in a Deed of Exchange executed by the parties on said date. A new title over the lot was issued in the name of LPM under TCT No. 10020-R; that on May 25, 2002, said factory building was totally destroyed by fire and LPM's only remaining property today is the industrial lot; that LPM has been suffering from irreversible losses and can no longer sustain its continued operations. Hence, the Board of Directors and stockholders of LPM have decided to dissolve the company and return the capital invested by Maosca by way of liquidating dividend. In reply, please be informed that 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 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) aIDHET Section 189 of Revenue Regulations 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 Section 189 of Revenue 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. Accordingly, the distribution in liquidation of assets of LPM, to its stockholder, 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) cEISAD Since the conveyance by LPM of its real property as liquidating dividend to Maosca 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. Section 8 of Revenue Regulations No. 6-2008, provides viz. : "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 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 fair market value of property received and the cost of the investment in shares shall represent the capital gain or capital loss from 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." In BIR Ruling No. 039-92 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) (l.) and (B) thereof, in case of a non-resident alien individual. Accordingly, the gain, if any, derived by the stockholders of J.R. Estrada shall be subject to the regular income tax imposed under Section 24 of the Tax Code, as amended. aTEHIC The capital gain so realized shall be subject to income tax at the rates prescribed under Section 24 (C) of the Tax Code of 1997. 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. (BIR Ruling Nos. 028-2002 and 270-1991) The sale by the stockholders of LPM of the distributed assets received by them as return of investment immediately after title thereto is transferred to 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) 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 are different, then this ruling shall be considered null and void. DaHSIT Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service