Taxability of Liquidating Dividends in Exchange for Shares of Stocks

December 21, 1984 BIR RULING NO. 190-84 34-g-119-84-190-84 Gentlemen : This refers to your letter dated June 11, 1984 stating that due to policy differences, all the stockholders of Dee Chian Hong and Sons, Inc., (all of whom are individuals) are contemplating to liquidate their company and to distribute all its properties to all the stockholders after paying all corporate creditors; and that said properties will be distributed as liquidating dividends by the corporation in exchange for the Dee Chian Hong shares of stocks. Based on the foregoing representations, you request information on the following queries: 1. Will the liquidating dividends (i.e., the difference between the fair market value of the properties received and cost of the share to the stockholders) be treated as capital gain (long term or short term) depending on holding period? 2. How would the said gain derived by individual stockholders be taxed? Would it be at 10% and 20% under Section 34(g) or the graduated income tax rates under Section 21(b) of the Tax Code, as amended? In reply, I have the honor to inform you that since the individual stockholders of Dee Chian Hong and Sons, Inc. will receive upon the complete liquidation of the corporation all its assets as liquidating dividend, 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. 83(a); Sec. 256, Income Tax Regulations) shall be subject to income tax at the rates prescribed under Section 21(b) of the Tax Code, as amended. Moreover, pursuant to Section 34(b) of the Tax Code, only 50% of the aforementioned capital gains 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. Very truly yours, (SGD.) ROMULO M. VILLA Acting Commissioner