Taxability of Transfer of Assets to Controlling Stockholders by Way of Liquidating Dividends

July 8, 1999 BIR RULING NO. 092-99 64 (B)-196-24 (D) (I)-DA-313-09 Fundamental Development Corporation P. Tuazon corner 20th Avenue Cubao, Quezon City Attention: Mr . Tony Chua President Gentlemen : This refers to your letter dated April 5, 1999 stating that Fundamental Development Corporation is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Twenty Million Pesos (P20,000,000.00) divided into Ten Thousand (10,000) shares with a par value of Two Thousand Pesos (P2,000.00) per share; that on October 28, 1998, the Board of Directors and stockholders of Fundamental Development Corporation in a special meeting held at Quezon City Sports Club unanimously approved to dissolve the Corporation by shortening its corporate life until December 4, 1998; that as a result of the dissolution, the remaining asset of the corporation consisting of one (1) parcel of land located at Corner Rodriguez Ave. and Ortigas Ave. Ext., San Isidro, Taytay, Rizal covered by Transfer Certificate of Title No. 619375 issued by the Registry of Deeds for the Province of Rizal and subdivided into four (4) smaller lots identified as Lot A-3-B-1, Lot A-3-B-2, Lot A-3-B-3 and Lot A-3-B-4, Psd-04-116575, will be distributed to its stockholders, by way of liquidating dividends as follows: LLjur i) Lot A-3-B-1 Psd-04-116575 to Tony Chua, Cu Siok Lu and Stuart Chua; ii) Lot A-3-B-2 Psd-04-116575 to Patricia Go Lim; iii) Lot A-3-B-3 Psd-04-116575 to Lourdes Ching; and iv) Lot A-3-B-4 Psd-104-116575 to Tony Chua, Cu Siok Lu and Stuart Chua; and that Fundamental Development Corporation has no liability of any kind. Based on the foregoing, you now request for a ruling on the following queries: "(1) Whether the corporation, in transferring the said parcels of land to its stockholders, is subject to the corporate income tax and therefore also to the creditable expanded withholding tax of 6%; "(2) Whether the corporation is subject to the documentary stamp tax on the document transferring the land to the controlling majority stockholders; and "(3) Whether the stockholders who sell their distributed asset received by them as return of investment immediately after title thereto is transferred to their names, subject to the final capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997." In reply, please be informed that as follows: 1) Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations, as last amended by Revenue Regulations No. 2-98, implementing Section 64(B) of the Tax Code of 1997, does not apply to transfers in complete liquidation where the assets of the liquidating corporation are transferred to its stockholders in exchange for the surrender of the latter's shares of stock for cancellation by the corporation. This conveyance is without consideration. The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered as a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. [W. P. Fax & Sons Inc., Petitioner v. Commissioner of Internal Revenue, Respondent, 15 BTA 115; Jordan Petroleum Company, 13 AFTR 2d 1692 (227 F. Supp. 174); J.T.S. Brown & Son Company v. Commissioner of Internal Revenue, 10 TC 840] Hence, the transfer by Fundamental Development Corporation of its assets, i. e., one (1) parcel of land, to its controlling stockholders by way of liquidating dividends is not subject to the expanded creditable withholding tax imposed under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, as last amended by Revenue Regulations No. 2-98 (BIR Ruling No. 059-90 dated April 17, 1990), and consequently, the same is not subject to the corporate income tax. 2) Section 189 of Revenue Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations provides, viz: "SEC. 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 the assets of Fundamental Development Corporation, consisting of one (1) parcel of land, to its controlling majority 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); and 3) The sale by the stockholders of Fundamental Development Corporation of the distributed asset 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 dated February 1991). 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. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue