Tax Consequence of the Liquidation of the Corporation of All Its Assets as Liquidating Dividends

May 14, 1987 BIR RULING NO. 128-87 21-d 190-84 128-87 M a d a m : This refers to your letter dated March 2, 1987 requesting in behalf of Zerimo, Inc. of No. 29 Biak na Bato, Q.C., a ruling as to the tax consequence of the following transactions: "The stockholders of a corporation which has no liabilities and no assets other than real estate properties decide they want to terminate the company's corporate life. Can the stockholders simply agree to divide the corporate assets among themselves through a distribution of the company's real estate properties in proportion to the shareholdings? What will be the taxes involve in this case if, for the sake of argument, the land at book value is nominally P 1 / 5 sqm, and is now worth P15/sqm? "One of the shareholders in the above situation decides to retain the corporation, rather than have it liquidated. Can he/she buy the shares of the others or retire these shares into treasury by exchanging land assets of the company for the shares? Is there any other way in which the partition can be effected? What will be the taxes involved in this case for the shareholders whose shares are bought off?" In reply thereto, I have the honor to inform you as follows: (1) Since the individual stockholders of the corporation will receive upon the complete liquidation of the corporation all its assets 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. 76(a), Tax Code; Sec. 256, Revenue Regulations No. 2) shall be subject to income tax at the rates prescribed under Section 21(a) of the Tax Code, as amended. iatdc Moreover, pursuant to Section 34(b) of the Tax 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 twelve months and 100% of the capital gain if the shares were held for less than twelve months, (2) If one of the shareholders decides to retain the corporation, he can buy the shares of stock of the other stockholders. The shareholders-sellers shall be subject to the capital gains tax prescribed under Section 21(d) of the Tax Code as amended by Executive Order No. 37, and, (3) If the corporation acquires its own stock and exchanges its assets (land) for the shares, the shareholders who surrendered their shares for land shall likewise be subject to the capital gains tax prescribed under Section 21(d) of the Tax Code as amended by Executive Order No. 37. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner