Return of Shares of Stock to Real Owners After Having Been Erroneously Declared and Paid as Property Dividends to Another Party Not Subject to Capital Gains Tax and Documentary Stamp Tax

February 27, 1997 BIR RULING NO. 018-97 24 (e)(2) (A) 000-00 018-97 R.S. Bernaldo & Associates Unit 1810, Cityland 10 Condominium Tower I 6815 Ayala Avenue Makati City Attention: Atty . Rosario S . Bernaldo General Manager Gentlemen : This refers to your letter dated January 19, 1996 requesting for a ruling that the return of shares of stock to its real owners after having been erroneously declared and paid as property dividends to another party is not subject to capital gains tax and documentary stamp tax. It is represented that Fil-Estate Golf & Development, Inc. (FEGDI) is a 50:50 joint venture between Fil-Estate Properties, Inc. (FEPI) and Dynaland Properties & Developers, Inc. (DYNALAND);that under its Shareholder's Agreement, any profit shall be divided between them on a 60:40 basis for FEPI and DYNALAND, respectively; that on May 10, 1994, FEGDI erroneously declared and paid property dividends in the form of 186 shares of stock of Southwoods Golf Club valued at P638,000 per share which were splitted EQUALLY between FEPI and DYNALAND; that this resulted in an overpayment of 19 shares to DYNALAND; that DYNALAND, for its part, declared and paid property dividends to its three investors, namely: (1) Southern Heights Land Dev. Corp. 67 shares (2) Greenfield Development Cor. 15 shares (3) Buenafortuna, Inc. 4 shares TOTAL 86 shares ======= that the property dividends declared to the aforestated three (3) investors included the above-stated overpaid nineteen (19) shares made to DYNALAND; that at present, the subject shares, which include the erroneously paid nineteen (19) shares in Southwood Golf Club, are not yet registered in the names of the three (3) aforestated investors after payment of the corresponding documentary stamp tax; that FEPI is now asking for a return of the nineteen (19) erroneously declared and paid shares; and that for its part, DYNALAND and its three (3) investors executed a Deed of Trust which affirms the ownership of FEPI on the nineteen (19) shares. In reply, please be informed that pursuant to Section 24 (e) (2) (A) of the Tax Code, as amended, capital gains realized from the sale, exchange or disposition of shares of stock not traded through a local stock exchange in any domestic corporation is taxable as follows: Not over P100,000 10% Over P100,000 20% However, considering that the transfer or disposition of the subject shares of stock in this instant case is erroneous, no valid transfer of the said shares of stock can take place. A return, therefore, of the said shares of stock to its rightful owner is only but proper as provided for under Article 2154 of the New Civil Code, viz: "Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises." In view thereof, there being no valid declaration of property dividends but instead a return of erroneously received property dividends, the said transfer is not subject to capital gains tax under Section 24 (e) (2) (A) of the Tax Code, as amended. Moreover, the return of the said shares to FEPI, which is the real and beneficial owner of the said shares of stock, is not also subject to the documentary stamp tax imposed under Section 176 of the Tax Code, as amended, but only to the P15.00 documentary stamp tax imposed on notarial acknowledgment of Deeds of Trust pursuant to Section 188 of the same Code. This ruling is being issued on the basis of the foregoing facts as represented. However, if it will be discovered upon investigation that the facts are different, then this ruling shall be considered null and void from the date of issue. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue