Valuation of the Land and Building Received by the Stockholders as Liquidating Dividends

February 13, 1989 BIR RULING NO. 021-89 21 (a) & (c) 136-88 021-89 Gentlemen : This refers to your letter dated February 3, 1989 stating that Maple Enterprises, Inc., is a domestic corporation engaged in the business of leasing real estate; that it owns a 505 sq. m. parcel of land on Pasong Tamo St. (near Kamagong St.), Makati which it acquired for P151,500.00; that it erected a building thereon at the cost of P41,550.00; that the building has been fully depreciated by the corporation in its books; that the land and building are leased to another corporation on a month to month basis for P12,000.00 a month; that the stockholders are considering the cessation of the corporation's business operations, the termination of the lease, the liquidation of the corporation and the distribution of its net assets which consist of the land and building with a total book value of P151,500.00 and advances to stockholders in the amount of P453,494.37; and that it is proposed that the remaining assets will be turned over to the stockholders, each of whom will be, entitled to a share in proportion to their equity in the corporation. cdtech In connection therewith, you now request a ruling on the following: (1) How will the land and the building to be received by the stockholders as liquidating dividends be valued for purposes of determining the gain to be derived by the stockholders which will be subject to income tax; (2) If the stockholders sell the property (land and building) received as liquidating dividends immediately after title thereto is transferred to their names and after the lease thereon shall have been terminated, will the stockholders be subject to the payment of the 5% capital gains tax pursuant to Section 21(e) of the Tax Code, as amended. In reply thereto, I have the honor to inform you as follows: (1) Since the stockholders of your company will receive upon its liquidation its assets consisting of the aforementioned land and building as liquidating dividends, they will thereby realize capital gain or loss. The gain, if any, derived by the individual stockholders consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings in the said corporation. [Sec. 66(a) Tax Code, Sec. 256, Income Tax Regulations] shall be subject to income tax at the rates prescribed under Section 21(a) of the Tax Code, as amended by Executive Order No. 37. Under the 1987 Zonal Values of real properties for Makati (East and West), the aforementioned land located in Pasong Tamo St. near Kamagong St., Makati is classified as commercial regular and has a zonal value of the P2,400 per square meter. Moreover, the zonal value of the building has to be determined in accordance with Revenue Audit Memorandum Order No. 1-88 dated February 4, 1988 (copy attached). Moreover, pursuant to Section 33(b) of the Tax Code, as amended, 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 twelve months and 100% of the capital gains if the shares were held for less than twelve months. (2) If the stockholders sell the aforementioned land and building received by them as liquidating dividends immediately after title thereto is transferred to their names and after the lease thereon shall have been terminated, the stockholders shall be subject to the 5% capital gains tax based on the gross selling price thereof or the fair market value prevailing at the time of sale whichever is higher pursuant to Section 21(c) of the Tax Code, as amended. Very truly yours, (SGD.) JOSE U. ONG Commissioner