Tax Liability of the Dividend Received by ACD, Inc.'s Stockholders

June 21, 1989 BIR RULING NO. 130-89 21 (c) (2) 028-89 130-89 S i r : This refers to your letter dated June 7, 1989 stating that your client, ACD, Inc. is a domestic corporation organized and existing under Philippine laws; that all the stockholders of the corporation are citizens of the Philippines; that the total outstanding shares of the company consisted of 136,132 shares of common stock with a par value of P100, equivalent to an aggregate value of P13,613,200; that as of December 31, 1988, the total retained earnings of the company was P48,920,610; that part of the assets of the corporation are two parcels of land, one in Bagong Ilog, Pasig and another in Tagaytay; that the land in Bagong Ilog has a book value as of December 31, 1988 of P799,849 and an estimated fair market value of P16,771,650 based on zonal valuation; that the land in Tagaytay has a book value as of the same date of P195,187 and an estimated fair market value of P431,684 based on the latest tax declaration; and that the corporation wants to declare and distribute said parcels of land as dividends to its stockholders. cd In connection therewith, you now request confirmation of your opinion as follows: "1. The property dividend which will be received by ACD, Inc.'s stockholders shall be subject to a final withholding tax of 0%; "2. The property dividend shall be recorded in both the issuing corporation's and the recipient stockholder's records at the fair market value of the real property at the time of the dividend distribution; "3. The company is not subject to income tax or capital gains tax on the excess of the fair market value over the book value of the two parcels of land that will be declared and distributed as property dividend; and "4. Upon the subsequent sale or other disposition of the property received as dividend by the stockholders, the basis of such property shall be its fair market value at the time of the dividend distribution." In reply thereto, I have the honor to inform you as follows: 1) Dividends comprise any distribution whether in cash or other property, in the ordinary course of business, even though extraordinary in amount, made by a domestic or resident foreign corporation to the stockholders out of its earnings or profits. Moreover, dividends paid in securities or other property (other than its own stock) in which the earnings of a corporation have been invested, are income to the recipients to the amount of the full market value of such property when receivable by individual stockholders. (Section 250 and 251, Revenue Regulations No. 2) Accordingly, your client can distribute its property dividends consisting of the aforementioned parcels of land to its stockholders who are subject to tax at 0% effective January 1, 1989 (Sec. 21(c)(2), Tax Code, as amended by Executive Order No. 37); 2) That your opinion to the effect that the property dividend shall be recorded in both the issuing corporations and the recipient stockholder's records at the fair market value of the property at the time of the dividend distribution is hereby confirmed; 3) That your opinion to the effect that the company is not subject to income tax or capital gains tax on the excess of the fair market value over the book value of the two parcels of land that will be declared and distributed as property dividend is likewise hereby confirmed; and 4) That upon the subsequent sale or other disposition of the property received as dividend by the stockholders, the basis of such property shall be its fair market value at the time of the dividend distribution. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner