BIR Ruling [UN-182-95]

May 9, 1995 BIR RULING [UN-182-95] Siguion Reyna, Montecillo & Ongsiako 8755 Paseo de Roxas, Philcom Bldg. Makati City Attention: Atty . Jose Lis C . Leagogo Gentlemen : This refers to your letter dated April 20, 1995 requesting a ruling on the tax implication of the return to a group of stockholders of DS Realty, Inc. of their capital investment which was originally in the form of a large tract of land owned in common pro-indiviso with other stockholders and which will now be returned to them in lots specifically identified in metes and bounds as well as the cost basis of the specific land/lots to the stockholders when the same are returned to them. cdtech It appears that Philippine Global Communications (Philcom) is the registered owner of various parcels of land situated in Dasmarias, Cavite covered by TCT Nos. 73764, 73765, 73766, 73767, 73768 and 91336; that on June 26, 1982 Philcom declared the aforesaid parcels of land as property dividends in favor of its stockholders of record as of March 24, 1980 and/or to their respective assignees in proportion to their respective stockholdings in Philcom; that the stockholders and assignees have assigned all their rights and interest to the aforesaid parcels of land to DS Realty, Inc. and have accordingly directed Philcom to execute the necessary deed of transfer of the aforesaid parcels of land in favor of DS Realty, Inc.; that three (3) groups of DS Realty, Inc. shareholders are co-owners of 133 hectares of the aforesaid land; that the said groups of stockholders together with all of the co-owners of said big parcel of land invested the same for shares of stock of DS Realty, Inc.; that the groups of stockholders have indicated their desire to withdraw their subscription in DS Realty, Inc. and the latter is willing to return to the former their investments in the specific land/lots; that an agreement was executed by and between DS Realty, Inc. and the groups of stockholders whereby DS Realty, Inc. agreed to return to the said groups of stockholders the parcels of land covered by Lot 6188-E Psd 94-029149-TCT No. 245381, Lot 6188-D Psd 04-029149-TCT No. 245383, and another parcel of land containing an area of 9,050 square meters which represents their investments in DS Realty, Inc. which the groups of stockholders have decided to withdraw; and that the aforesaid groups of stockholders have surrendered their certificate of stocks to DS Realty, Inc. duly endorsed. In reply thereto, please be informed that dividends comprise any distribution whether in cash or other property, in the ordinary course of business, even though extraordinary in amount, made by a 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 2551, Revenue Regulations No. 2). However, property dividends made by a domestic, or resident foreign corporation to its individual stockholders are now subject to 0% effective January 1, 1989 (Sec. 21(c) (2), Tax Code, as amended on E.O. No. 37). Such being the case, the cost basis of the properties declared as property dividend by Philcom and which will be returned to the groups of stockholders who are demanding that their land investment in DS Realty, Inc. be returned to them is the full fair market value of the properties at the time when the same was declared as property dividend to the stockholders in 1982. (BIR Ruling No. 146-89 dated July 12, 1989; and BIR Ruling No. 028-89 dated February 22, 1989) Moreover, appreciation in value of properties is not even an accrual of income to a taxpayer prior to the realization of such appreciation through sale or conversion of the property. (Sec. 38, Revenue Regulations No. 2) Thus, although the groups of stockholders will be receiving parcels of land as a return of their investments and/or capital, the values of which had already appreciated, the same is not yet considered as income to the stockholders until such time that the stockholders sell said property. (BIR Ruling No. 117-89 dated June 5, 1989) Furthermore, since the transfer to the stockholders of the lots specifically identified in metes and bounds is only a return of their capital investments in DS Realty, Inc., the same is not subject to the expanded withholding tax under Revenue Regulations No. 12-94 amending Revenue Regulations No. 6-85 as amended otherwise known as the Expanded Withholding Tax Regulations. (BIR Ruling No. 271-87 dated September 8, 1987) Finally, considering that the transfer of the lots to the stockholders is not in connection with a sale or its sale and the same is without any monetary consideration, the Deed to be executed to effect the transfer of said properties to the stockholders is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended. The acknowledgment however, of said Deed of Conveyance is subject to the documentary stamp tax of ten (P10.00) pesos on certificates pursuant to Section 188 of the same Code. (BIR Ruling No. 498-93 dated December 20, 1993). The stockholders shall cause to be annotated on the Transfer Certificate of Title the fair market value of the property at the time it was declared as property dividend in their favor. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. cdll Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)