BIR Ruling No. 245-61

June 26, 1961 BIR RULING NO. 245-61 Messrs. Sycip, Gorres, Velayo & Co. Certified Public Accountants P. O. Box 589, Manila Gentlemen : Reference is made to your letter of the 10th instant, requesting confirmation of your opinion that for the purpose of computing the income tax which may be due from the nonresident stockholders of the Balatoc, Inc. as a result of its dissolution, said stockholders can appraise the value of the Benguet Consolidated shares that they will receive at P3.00 per share. You stated that "The stockholders of Balatoc, Inc. have duly adopted a resolution amending its Articles of Incorporation, shortening the term of its existence to March 26, 1961. The certificate of amendment of these articles has been filed with the Securities and Exchange Commission. prll "The assets of Balatoc, Inc. as of March 26, 1961 consisted entirely of 1,500,000 shares of stock in Benguet Consolidated, Inc. and cash, including assets readily convertible to cash, Balatoc, Inc. has 6,000,000 shares outstanding. Consequently, the liquidation of Balatoc, Inc. will involve the distribution to the stockholders of the corporation as of March 26, 1961 of one Benguet share for every four Balatoc, Inc. shares held by that stockholder. In a ruling issued by your office under date of October 7, 1952 it was stated that the liquidating corporation is not under any obligation to withhold income tax on the liquidating dividends payable to its nonresident stockholders, although the corporation should file income tax returns for all the nonresident stockholders and pay the tax due thereon upon assessment by the Bureau of Internal Revenue. . . In view of the foregoing, it becomes necessary, to comply with the income tax law and regulations, for Balatoc, Inc.'s stockholders to determine the market value of the shares of stock in Benguet Consolidated, Inc. which are to be distributed to them. We have reviewed the Manila Stock Exchange's report of the daily transactions in shares of stock of Benguet Consolidated. Inc. beginning March 1, 1961. These records show that 200 Benguet shares were traded on March 14, 1961 at P3.20 per share, 200 shares were traded on March 15 at P3.10 per share, 100 shares were traded on March 16 at P3.10 per share. March 26, being a Sunday, the records of the Manila Stock Exchange will show that on March 24 and 27 there was a seller offering to sell Benguet Consolidated, Inc. shares at P3.00 per share and that 600 Benguet Consolidated, Inc. shares were traded on March 29, 1961 at a price of P3.00 per share. There were no further transactions in Benguet Consolidated Inc. shares until May 15, 1961 when 500 shares were sold at P2.80 per share. Thereafter, there was a recorded sale of 55 shares at P2.80 per share on May 29, 1961. "For your information, the number of Benguet Consolidated, Inc. shares which most of Balatoc, Inc.'s nonresident stockholders will receive will be in quantities approximating the trading volume in Benguet Consolidated, Inc. shares as described in the foregoing paragraph. "It is our opinion that for the purpose of the income tax returns of the nonresident stockholders of Balatoc, Inc. and the computation of the amount of income taxes, if any, which each nonresident stockholder will have to pay on the liquidating dividends he will receive, the Benguet Consolidated, Inc. shares should be appraised at their fair market value on March 26, 1961. Based on the transactions in Benguet Consolidated, Inc. shares on the Manila Stock Exchange, as set out above, this fair market value is P3.00 per share, which is the fair market value of the shares as of March 26, 1961." In your supplementary letter of the 23rd instant, it is further stated that "Balatoc, Inc. has 6,000,000 shares of stock outstanding. Its only assets consisted of 1,500,000 Benguet Consolidated, Inc. shares and cash or assets readily convertible to cash, such as accounts and notes receivable. Of the outstanding shares, 3,967,473 shares belong to Benguet Consolidated, Inc. so that approximately two-thirds of Balatoc's outstanding stock is owned by Benguet Consolidated, Inc. As early as January, 1961, the stockholders of Balatoc, Inc. were already informed that a special meeting was being called for the purpose of dissolving Balatoc, Inc. as of March 26, 1961 and that each Balatoc stockholder would definitely receive one Benguet share for every four Balatoc shares which he owned. Benguet Consolidated, Inc. voted in favor of the dissolution of Balatoc, Inc. as of March 26, 1961. Balatoc, Inc. has already determined the number of shares and the amount of cash that each of its stockholders will receive as liquidating dividends and actual transfer and registration of the Benguet certificates owned by Balatoc, Inc. into the names of Balatoc's stockholders who will receive it as liquidating dividends is almost completed. It is the intention of Balatoc, Inc. that before it releases to its nonresident stockholders their share in the liquidating dividends, they will require these stockholders to submit signed and accomplished copies of Philippine income tax returns reporting their gain or loss as a result of the receipt of the liquidating dividends and Balatoc will withhold from their respective shares in the cash assets of the corporation whatever amount appears as the stockholder's income tax liability in the income tax returns submitted to it. Information will further be required from these stockholders regarding their mode of acquisition of their shares of Balatoc, Inc. and their cost basis for these shares. cdti "You will note from all of the foregoing that as of March 26, 1961, the ownership of the Balatoc stockholders in the Benguet shares to be received by them as liquidating dividends already became vested. As far as Balatoc, Inc. was concerned, it did not have to go thru a process of liquidating its assets because it had no other assets except the Benguet shares and cash. You will further note from the foregoing that it is important that the fair market value to be placed on the Benguet shares to be received as liquidating dividends be determined before the shares are actually distributed, because otherwise it will be impossible to compute the Philippine income tax liabilities of Balatoc's nonresident stockholders and for Balatoc to withhold from the cash payable to these stockholders an amount sufficient to cover their income tax liabilities to the Philippine government as stated in the returns prepared and signed by these stockholders. It is therefore our opinion that under the particular facts of this case a valuation of the Benguet shares at P3.00 per share, which was the market value on March 26, 1961, is proper . . ." In answer thereto, I have the honor to inform you that, based on the aforequoted representations, the value of the Benguet Consolidated shares that the nonresident stockholders of the Balatoc, Inc. will receive should be appraised at the date when entries in the books of the latter corporation are made making available to said stockholders those shares which date, according to representation of counsel, is March 27, 1961. cdt Very truly yours, (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue