Capital Gains Tax for 'Liquidating Dividends'

July 4, 1989 BIR RULING NO. 134-89 21 000-00 134-89 S i r : This refers to your letter dated April 5, 1989 on behalf of your client, Oriental Club, Inc. stating as follows: Oriental Club, Inc. (OCI) is a non-stock, non-profit corporation organized and existing under the laws of the Philippines; that it is the owner of a parcel of land located in Mandaluyong, Metro Manila containing an area of 14,295 square meters covered by Transfer Certificate Titles; that on October 15, 1985 a Deed of Conveyance covering the aforementioned parcel of land which has a fair market value of P16,835,000.00 was executed by OCI as assignor in favor of Oriental Holding Corporation (OHC) as assignee in exchange for P168,350 common shares of stock with a par value of P100.00 per share of OHC; that as a result of the exchange, OCI gained control of OHC since OCI acquired 93.53% of the authorized capital stock of OHC; that the exchange is not subject to the capital gains tax pursuant to then Section 35(c)(2)(c) of the Tax Code considering that after the exchange and as a result of the exchange, OCI gained control of OHC by owning 93.53% of the authorized capital stock of OHC; that on November 24, 1986, the Board of Directors of OCI unanimously approved a resolution to dissolve the corporation by shortening its corporate existence up to March 31, 1987 which was approved by the Securities and Exchange Commission on August 24, 1986; that it was further resolved to assign the assets together with the liabilities of OCI to its members, after making arrangements with the creditors of OCI for the assumption by the members of the liabilities of OCI; that on November 17, 1987, Stock Certificate No. 1 issued to OCI by OHC was cancelled and new certificates of stock were issued to the individual members, and that 30,231 shares which were held for unlocated members under Stock Certificate No. 055 was placed in the name of OCI. In connection therewith, you now request a ruling on the following: (1) "Whether the club members are subject to the capital gains tax for 'liquidating dividends' upon the distribution of the OHC shares to them as a result of the dissolution of OCI," and (2) "Whether the individual members are liable to pay income tax upon the eventual distribution to them of the unallocated shares of stock and/or the other assets of OCI." In reply thereto, I have the honor to inform you as follows: (1) Considering that the individual members of OCI are not stockholders since OCI is a non-stock, non-profit corporation, the OHC shares of stock as well as the unallocated shares of stock which will eventually be distributed to them as a result of the dissolution of OCI cannot be considered as liquidating dividends so as to subject the individual members to income tax under Section 21(a) of the Tax Code; and casia (2) The OHC shares of stock as well as the unallocated shares of stock which will eventually be distributed to the individual members as a result of the dissolution of OCI are considered as income of the individual members under Section 28(a) of the Tax Code which is subject to tax under Section 21(a) also of the same Code. Very truly yours, (SGD.) JOSE U. ONG Commissioner