Corporation that Distributes its Assets in Liquidation is Not Subject to Creditable Withholding Tax

July 22, 2002 BIR RULING NO. 028-02 KNECHT, Incorporated Room 508, J & T Building Magsaysay Boulevard, Sta. Mesa M a n i l a Attention: Mr. Rene Knecht Gentlemen : This refers to your request for the issuance of a Certificate Authorizing Registration (CAR) which was referred to this Office by Revenue District No. 43, Pasig City, of a Deed of Conveyance of certain real property located within the said district, executed by Mr. Rene Knecht, in his capacity as President of Rose Packing Company, Inc., a domestic corporation whose corporate life expired last June 10, 1986, in favor of Knecht, Incorporated for the benefit of the stockholders and creditors of the former pursuant to Section 122 of the Corporation Code; that per Minutes of the Special Stockholders' and Board of Directors' Meeting of Rose Packing Co., Inc. held at 45 Lovina Street, Pasay City on January 27, 1989 at 10:00 A.M., the following resolution was adopted and approved, viz. : "WHEREAS the corporate life of Rose Packing Co., Inc. expired on June 10, 1986 but under Section 122 of the Corporation Code it has three years from said expiration within which to convey all its property to a trustee for the benefit of stockholders, creditors and other persons in interests. "NOW THEREFORE, resolved as it is hereby resolved to convey as it hereby conveys, to Knecht Inc. all the property of Rose Packing Co., Inc. as trustee for the benefit of stockholders and creditors and other persons in interests of Rose Packing Co., Inc." and that the properties involved are three (3) parcels of land covered by Transfer Certificates of Title Nos. 286176 located at Sto. Domingo, Cainta, Rizal, 286174 and 256175, both located at San Joaquin, Pasig, Metro Manila, are registered at the moment in the name of Philippine Commercial and Industrial Bank. Based on the foregoing, you now, in effect, request for exemption from income tax and consequently from the withholding tax, as well as documentary stamp tax imposed under Section 196 of the Tax Code, as amended. In reply, please be informed that, since the Deed of Conveyance was executed on February 13, 1989, the pertinent provisions of the Tax Code obtaining at that time shall apply. The Bureau has held in several rulings that the conveyance of real property to a trustee without consideration is exempt from income tax and withholding tax, as well as from the documentary stamp tax imposed on conveyances of real property under then Section 196 of the Tax Code, as amended. Those rulings, however, state that the notarial acknowledgement appearing on the deed of conveyance is subject to documentary stamp tax of Three Pesos (P3.00) under then Section 188 of the Tax Code, as amended. Nonetheless, the application of these principles will depend on the facts of each case. While this case may indeed involve a transfer of property to a trust, the transfer is also being made in connection with the dissolution of Rose Packing Company, Inc., whose corporate life expired on June 10, 1986. An incident to the dissolution of a corporation is the distribution of liquidating dividends to the corporation's shareholders in the form of the remaining net assets of the corporation (that is, net of any liabilities to the corporation's creditors). Shareholders of the corporation may realize gain or loss on their receipt of liquidating dividends from the dissolving corporation. The 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 in the said corporation. In this case, it is purported that the 3 parcels of land are being distributed to Knecht, Incorporated, in its capacity as trustee of the assets of Rose Packing Company, Inc., for the benefit, not only of stockholders, but also of creditors and other persons having interest in such assets. There is no indication in the records of this case that Rose Packing Company, Inc. still has creditors, but it is alleged that the Deed of Conveyance is without consideration and the execution thereof is not in connection with a sale but for the benefit of stockholders and creditors and other persons in interest of Rose Packing Co., Inc. pursuant to Section 122 of the Corporation Code which provides that at any time during the three (3) year period after the dissolution of a corporation, the latter is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. That liquidation can be done through the procedure of assigning the properties of the corporation to a trustee for the benefit of its creditors, shareholders, members, and other persons in interest has been reiterated in a number of Supreme Court decisions and SEC opinions. Moreover, the three-year limitation will not apply if a trustee is designated within the said period. Unless the trusteeship is specifically limited in its duration by the deed of trust, there is no time limit within which the trustee must complete the liquidation in its hands, and claims not barred by the statute of limitations can be presented and allowed during its continuance. Accordingly, if indeed Rose Packing Company, Inc. (now substituted by the trust of which Knecht, Incorporated is the trustee) has no other creditors, the receipt by the trustee of the 3 parcels of land is in effect a distribution of liquidating dividends to the shareholders of Rose Packing Company, Inc. In such a case, the tax consequences would be as follows: (1) Since the stockholders of Rose Packing Company, Inc. will receive upon its liquidation its assets consisting of the aforementioned land 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. 256, Income Tax Regulations] shall be subject to income tax at the rates prescribed under then Section 21(a) of the Tax Code, as amended by Executive Order No. 37. Moreover, pursuant to then 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. Finally, this Office has ruled that the conveyance of real property in the form of liquidating dividends to the stockholders is not subject to documentary stamp tax under Section 196 of the Tax Code. (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 then Section 21 (c) of the Tax Code, as amended. (BIR Ruling No. 021-89 dated February 13, 1989) if the sale is effected on or after January 1, 1998, however, the capital gains tax rate is 6% (Section 24 (D) (1), Tax Code of 1997). The sale shall also be subject to documentary stamp tax under Section 196 of the Tax Code of 1997. On the other hand, if there are still creditors, such creditors have preference over the corporate assets of Rose Packing Company, Inc., vis--vis its shareholders, and therefore, the shareholders who are individuals are not yet deemed to be in receipt of their respective share in the net assets of the corporation. If that is the case, the transfer of the 3 parcels of land pursuant to the Deed of Conveyance is indeed a mere transfer to a trust, which would not be subject to the income tax, withholding tax, nor to the documentary stamp tax on conveyances of real property. The notarial certification, however, would be subject to the documentary stamp tax of Ten Pesos (P10.00) pursuant to then Section 188 of the Tax Code, as amended. The shareholders themselves become subject to income tax on the liquidating gains, if any, once the liabilities of the trust are settled and there is no impediment to the distribution of the net assets of the trust, whether or not there is in fact an actual distribution of such assets. For purposes of issuing a certificate authorizing registration, this Office takes note of later rulings to the effect that a corporation that distributes its assets in liquidation, is not subject to the creditable withholding tax, since such distribution does not constitute a sale of such assets. Thus, it has been held that the conveyance by a corporation of parcels of land as liquidating dividends is not subject to the creditable withholding tax on sales, exchanges or transfers of real property under then Revenue Regulations No. 1-90. (BIR Ruling No. 270-91 dated December 23, 1991) At any rate, at the time of the transaction in question, there was no withholding tax on transfer or disposition of real property. In addition, the transfer of real property as liquidating dividends to the shareholders of a corporation is not subject to documentary stamp tax on conveyance of real property. (BIR Ruling No. 059-90 dated April 17, 1990 cited in BIR Ruling No. 092-99 dated July 8, 1999) Accordingly, a certificate authorizing registration covering properties, which at the moment, are in the name of PCIB may be issued without the payment of expanded withholding tax and documentary stamp tax. 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 as null and void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue