Tax at 0% on Property Dividends Received by Individual Stockholders

September 22, 1989 BIR RULING NO. 206-89 21 (c) (2) 000-00 206-89 Gentlemen : This refers to your letter dated March 29 and April 3, 1989 stating that your client, Elnor Investment Co., Inc., is a family corporation with an authorized capital of P10,000,000.00 of which P9,180,400.00 has been subscribed and fully paid; that as of the end of the last fiscal year, it had a net worth of P47,734,609.22 and its retained earnings amount to P38,554,209.22; that among its assets are real estate properties with a total book value of about P15,964,241.32; that the fair market value of the real estate properties could be three of four times the book value; that the stockholders are considering the transfer to themselves of the real estate and some other properties of the corporation as property dividends in the following manner: The corporation will declare dividends equivalent to the book value of the properties intended to as transferred. Thus, if all the real estate properties will be transferred to the stockholders, the dividend resolution will read as follows: "a dividend of P15,964,244.32 is hereby declared, payable to the stockholders of record as of March 29, 1989 by transferring to them properties of the corporation with a book value of P15,964,241.32"; that since there are not enough properties to give each stockholder as separate property, it is intended that the different properties will be transferred to all the stockholders or to groups of stockholders in co-ownership in proportion; and that the corporation will continue to do business and the stockholders has no intention of liquidating the corporation after the proposed declaration of property dividends. Based on the foregoing representations, you now request confirmation of your following opinions: cdtech "1. There will be no tax on the dividends and it will be immaterial if the dividends declared will be at book value or the fair market value of the properties intended to be transferred to the stockholders; "2. If a stockholder who received real property as dividend sells his share in the property to a co-owner or to any other person, he will be subject to the capital gains tax of 5% on the fair market value of his share in the property; and "3. If a stockholder who received shares of stock as property dividend sells the shares, he will be subject to the stock transaction tax on the basis of his gain in the sale of the shares; and the gain will be computed with the book value of the dividend as his cost". In reply, please by informed 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 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. (Sections 250 and 251, Income Tax Regulations No. 2) The property dividends received by individual stockholders, citizens or residents, shall be subject to tax at 0% effective January 1, 1989, (Sec. 21(c)(2), Tax Code, amended by Executive Order No. 37) regardless of whether the property dividends will be declared at book value or at fair market value. 2) The individual stockholder selling his share in the real property dividend shall be subject to the 5% capital gains tax based on the gross selling price or fair market value prevailing at the time of sale, whichever is higher. (Sec. 21(e), Tax Code) 3) If a stockholder who received shares of stock as property dividend sells the shares, the stockholder shall be taxed at 1/4 of 1% based on the gross selling price of the shares of stock if said shares of stock are listed and traded through a local stock exchange. If the shares are not traded through a local stock exchange, then the net capital gain of the stockholder which is not over P100,000.00 shall be taxed at 10% and over P100,000.00 at 20%. To arrive at the net capital gain, the cost shall be determined as follows: cdt "SEC. 6. Determination of Tax Base . In determining the tax base, the following rules shall apply: b) Determination of Cost The cost basis for determining the capital gains or losses shall be the basis as determined in accordance with the provisions of Section 35 of the National Revenue Code,as amended, and its implementing regulations applied in the following manner: (1) If the stocks can be identified, then the cost shall be the actual purchase price plus all costs of acquisition such as commission, documentary tax, transfer fees, etc. (2) If the stocks cannot be properly identified, then the cost to be assigned shall be computed on the basis of the first-in, first-out (FIFO) (3) If books of accounts are maintained by the seller where every transaction of a particular stock was recorded, then the moving average method shall be applied rather than the first-in, first-out (FIFO) method. (4) In all cases, stock dividend received must be assigned a corresponding cost by allocating the original cost of acquisition to the total number of shares of stocks received as stock dividend. (Revenue Regulations No. 2-82) Very truly yours, (SGD.) JOSE U. ONG Commissioner