Modification of BIR Ruling No. 13-89

December 26, 1991 BIR RULING NO. 276-91 21 (c) (2) 130-89 276-91 Gentlemen : This refers to your letter dated November 21, 1990 stating that your client is a domestic corporation engaged in various industrial activities, either directly or through corporations which are at least 80% owned by client corporations; that your client corporation plans to declare a property dividend consisting of real estate properties, some of which are income-earning and other non-earning; that the annual income (rentals) from these real estate properties which are proposed to be declared as dividends amounts to only one percent (1%) of client corporation's total net sales for the year ended 31st December 1989; that after declaring these real estate properties as property dividend, your client corporation and its subsidiaries shall still be retaining ownership of factory sites and other lands which are bigger in area than the real estate properties which are proposed to be declared as dividends. cdt Based on the foregoing facts your client would like to have a confirmation of the following opinion: "1. That the proposed property dividend consisting of real estate properties can be recorded at book value in the books of our client corporation; and that client corporation's stockholders can record the dividends thus received either at client corporation's book value for said real estate properties or at the fair market value of said real estate properties; "2. That the one proposed property dividend which shall be received by the stockholders of client corporation shall be subject to a final withholding tax of zero (0%) percent whether the dividend is recorded by the stockholders at client corporation's book value for the real properties declared as property dividend or at their fair market value; and that the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of these real estate properties as property dividend; "3. That client corporations shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value in client corporation's book of the real estate properties declared and distributed as property dividend; and "4. That upon subsequent sale or other disposition of the real estate properties received as property dividend by client corporation's stockholders, the basis of the taxation of the subsequent sale or other disposition shall be the fair market value at the time of the dividend distribution." In reply thereto, I have the honor to inform you as follows: 1. That the property dividend shall be recorded at book value in the books of both the issuing corporation and the recipient stockholder. Accordingly, BIR Ruling No. 21 (c) (2)-028-89-130-89 applying Section 250 and 251 of Revenue Regulations No. 2 stating that 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 is hereby modified having been rendered obsolete by Executive No. 37 (effective August 1, 1986) subjecting to income tax at 0% effective January 1, 1989, dividends received from a domestic corporation and the share of an individual partner in a partnership subject to tax under Section 24 (a) of the Tax Code. 2. That we confirm your opinion that the proposed property dividend which shall be received by the stockholders of client corporation shall be subject to a final withholding tax of zero (0%) percent and that the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of these real estate properties as property dividend. 3. That we also confirm your opinion to the effect that the distributing company is not subject to income tax or capital gains tax on the excess of the fair market value over the book value of the two parcels of land because there is no realized gain considering the fact that the value used at the time of distribution is book value. 4. That upon the subsequent sale or other disposition of the property received as dividend by the stockholders, the basis of such property shall also be its book value at the time of the dividend distribution. cdtech This modifies BIR Ruling No. 13-89. Very truly yours, (SGD.) JOSE U. ONG Commissioner