Tax Consequences of the Transfer by a Liquidating Corporation of Its Remaining Assets to Its Stockholders

May 28, 1992 BIR RULING NO. 171-92 66 173 59-90 270-91 171-92 Romulo Mabanta Buenaventura Sayoc & De Los Angeles Fourth Floor, King's Court 2129 Pasong Tamo, Makati, Metro Manila Attention: Attys . Teresita A . M . Villaruz J . Salvador Y . Mirasol and Catherine T . Manahan Gentlemen : This refers to your letter dated March 17, 1992 stating that Citi Center Building Corporation (CCBC) is a domestic corporation which holds title to the condominium units in the Citi Center Condominium Project; that on December 13, 1991, the Securities and Exchange Commission approved the reduction of capital stock of CCBC to 40% of its authorized capital stock from P60,000,000.00 to P24,000,000.00 and its outstanding subscribed and paid-up capital stock from P50,202,600.00 to P20,081,100.00 pursuant to Section 122 of the Corporation Code; that by virtue of the reduction and pursuant to the SEC Approval, 60% of the outstanding capital stock of CCBC are supposed to be surrendered by CCBC stockholders to CCBC for cancellation; that in turn, since CCBC has no sufficient retained earnings and its only assets are the condominium units in the Project, 60% of the titles to these condominium units (CCTs) are supposed to be placed by CCBC in the name of the CCBC stockholders who surrendered their CCBC shares or of their assignees, in proportion to the number of reduced CCBC shares surrendered by the CCBC stockholder concerned; that two types of Agreement to Implement Reduction of Capital Stock (Agreement to Implement) are to be executed for the purpose (see Annexes "1" and "2"); that Annex 1 is to be executed by CCBC and a CCBC stockholder; that Annex 2, by CCBC and CCBC stockholder's assignee; that under Annex 1, the stockholder surrenders to CCBC its reduced CCBC shares for cancellation; that in turn, CCBC places a proportionate number of CCTs in the name of the stockholder; that under Annex 2, the stockholder surrenders to CCBC its reduced CCBC shares for cancellation; that in turn, CCBC places a proportionate number of CCTs in the name of the stockholder's assignee; that Annex 2 arises where the stockholder, before CCBC reduction, entered into a Deed of Assignment under which it assigned in favor of its assignee the right to receive CCTs pursuant to the reduction proportional to the CCBC shares to be surrendered for cancellation; and that by virtue of the assignment, the stockholder's assignee takes the place of the stockholder. In connection therewith, you now request confirmation of your opinions as follows: "1. CCBC is not subject to any tax for receiving from its stockholders and then cancelling the Reduced CCBC shares, since CCBC, is merely performing the ministerial function of implementing the Reduction of Capital Stock, does not take title to nor receive any value for the surrendered Reduced CCBC shares. The Reduced CCBC shares do not represent value since they are merely the documentary evidence of the Reduced Capital Stock and will cease to exist after cancellation; "2. CCBC, placing the CCTs in the name of its stockholder or its stockholder's assignee, is not subject to any income tax and is therefore not subject to the creditable withholding tax of 5% under Revenue Regulations No. 1-90, since CCBC is merely performing a ministerial function required under the law to carry out the SEC Approval of the Reduction. There is no separate consideration between CCBC and its Stockholder or the Stockholder's Assignee, and CCBC derives no income thereby. The instant case is analogous to complete liquidation where a corporation distributes its assets to its stockholders, on which the BIR has ruled that no income tax and therefore no creditable withholding tax arise (BIR Ruling No. 59-90 dated April 17, 1990); "3. No documentary stamp tax is due on the Agreement to Implement, since the placing of CCBC of the CCTs in the name of its Stockholder or Stockholder's Assignee has no consideration, and is premised upon the legal obligation of CCBC to cancel the Reduced CCBC shares pursuant to the SEC Approval (Section 185, Documentary Stamp Tax Regulations) "We also seek confirmation of the following conclusions applicable to the first type of Agreement to Implement: "4. On the part of some of the CCBC Stockholders, for the delivery of the CCTs in their name, the gain realized or loss sustained shall be computed based on the difference between the market value of the CCTs at the time of transfer and the acquisition costs of the respective CCBC shares surrendered to CCBC by the CCBC stockholder. Any income will be subject to 35% corporate tax, as in the case of complete liquidations ruled in BIR Ruling Nos. 21-89 dated Feb. 13, 1989; No. 136-88 dated April 12, 1988; No. 322-87 dated Oct. 19, 1987 and 119-84 dated July 12, 1984 respectively; "We also seek confirmation of the following conclusions applicable to the second type of Agreement to Implement: "5. The Deed of Assignment is not subject to documentary stamp tax, since what was assigned was merely a real right (i.e. Reduction Right) and not title to the CCTs could be taken thereby; "6. On the part of the Stockholder-Assignor, for the Assignment of its Reduction Rights with respect to the CCTs, any gain realized will be subject to 35% corporate tax; "Finally, with respect to both types of Agreement to Implement, we seek confirmation of the conclusion that: "7. The presentation of the proof of payments of all the taxes outlined in the foregoing paragraphs and your confirmation of such taxes in an official ruling will constitute the clearance that will enable the CCBC stockholder or its Assignee to have the CCTs registered in their names." In reply thereto, I have the honor to inform you as follows: (1) Your opinion that CCBC is not subject to any tax for receiving from its stockholders and then cancelling the Reduced CCBC shares, is hereby confirmed; (2) Your opinion that CCBC is placing the CCTs in the name of its stockholder or its stockholder's Assignee, is not subject to any income tax and is therefore not subject to the creditable withholding tax of 5% under Revenue Regulations No. 1-90 is likewise hereby confirmed. cdt 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 Fox & 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) cited in BIR Ruling No. 196-010-90-059-90 dated April 17, 1990) (3) The Agreement to Implement placing the CCTs by CCBC in the name of its stockholder or stockholder's Assignee is subject to documentary stamp tax. (Section 173, Tax Code, as amended) In all cases involving sale, exchange, or any disposition of real property as in the case, where real property is being distributed by the corporation to its stockholders as liquidating dividends, the tax base for documentary stamp tax purposes is the fair market value or zonal value of the real property (RMO No. 41-91; BIR Ruling No. 66-000-00-270-91 dated December 23, 1991) (4) That your opinion that on the part of some of the CCBC stockholders, the gain realized or loss sustained upon the surrender of their respective CCBC shares in exchange for the transfer in their name of the CCT's shall be computed based on the difference between the fair market value of the CCTs at the time of transfer and the acquisition or adjusted costs to the stockholders of their CCBC shares surrendered is hereby confirmed. Moreover, any income realized therefrom by CCBC corporate stockholder is subject to the 35% corporate income tax. (BIR Ruling No. 119-84 dated July 12, 1984) (5) Your opinion that the Deed of Assignment of the Reduction Right is not subject to the documentary stamp tax since what was assigned was merely a real right (i.e., Reduction Right) and no title to the CCTs could be taken thereby is hereby confirmed; (6) That any gain realized by the corporate stockholder-assignor on the assignment of its reduction rights with respect to the CCTs is subject to the 35% corporate income tax; Moreover, the Revenue Regional Director or the Revenue District Officer under whose administrative jurisdiction the taxpayer falls is authorized to issue the necessary certification authorizing transfer of title to real property to be presented to the Register of Deeds. LLjur Very truly yours, JOSE U. ONG Commissioner of Internal Revenue