December 22, 2009

BIR RULING [DA-(C-337) 818-09]

73 (A); Regs. No. 26; RR 6-2008;

028-2002; 270-1991; DA-164-2004;
DA-(C-173) 452-09; DA-(C-186)
473-09

Dipolog A.G. Lim Sons, Incorporated

Osmeña St., Dipolog City

Attention: Mr. Wilson T. Lim

Vice-President and Gen. Manager

Gentlemen :

This refers to your letter dated November 17, 2008, as indorsed by the
Regional Director, Revenue Region No. 15, Zamboanga City, requesting in effect for
an exemption from taxes on the transfer of real properties by Dipolog A.G. Lim Sons,
Incorporated (DAGLSI) as liquidating dividends to its individual stockholders.

It appears that DAGLSI is a domestic corporation duly registered with the

Securities and Exchange Commission (SEC) under SEC Registration No. DS-01956
dated June 9, 1989. DAGLSI after many years of existence has acquired the following
real properties:

1.) A parcel of land situated at Galas, Dipolog City, identified as Lot

1615-C, Psd-168570, containing an area of ONE THOUSAND FIVE
HUNDRED SIXTY FIVE (1,565) SQUARE METERS, more or less,
which is covered by Transfer Certificate of Title (TCT) No. T-10733 of
the Register of Deeds of Dipolog City;

2.) A parcel of land situated at Echavez Street, Dipolog City, identified as

Lot 972-A, Psd-101934, containing an area of FOUR HUNDRED
SIXTY EIGHT (468) SQUARE METERS, more or less, which is

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 covered by TCT No. T-11775 of the Register of Deeds of Dipolog City;

3.) A parcel of land situated at Sergio Osmeña Street, Dipolog City,

identified as Lot 343, Dipolog Cadastre, containing an area of FOUR
HUNDRED EIGHTY (480) SQUARE METERS, more or less, which is
covered by TCT No. T-8787 of the Register of Deeds of Dipolog City,
with its existing improvements;

4.) A parcel of land situated at Quezon cor. Mabini Sts., Dipolog City,
identified as Lot 3, Pcs-12579, containing an area of THREE
HUNDRED FIFTY TWO (352) SQUARE METERS, more or less, and
covered by TCT No. T-11773 of the Register of Deeds of Dipolog City,
with its existing improvements; AIaDcH

5.) A parcel of land situated at Rizal Ave. cor. Osmeña St., Dipolog City,
identified as Lot 2-A, Psd-09-0055485, containing an area of FIVE
HUNDRED TWENTY FIVE (525) SQUARE METERS, more or less,
which is covered by TCT No. T-11659 of the Register of Deeds of
Dipolog City;

6.) A parcel land * (1)situated at Rizal Ave., Dipolog City, identified as Lot
2-B, Psd-09-005485, containing an area of THREE HUNDRED
THIRTY TWO (332) SQUARE METERS, more or less, which is
covered by TCT No. T-12634 of the Register of Deeds of Dipolog City;

Aside from the above-enumerated properties there is an existing cash in the

hands of the Secretary-Treasurer in the amount of Six Million Two Hundred
Thousand Pesos (P6,200,000.00), Philippine Currency, which has to be declared as
liquidating cash dividends.

DAGLSI will be voluntary dissolved effective at the close of business hours on

July 28, 2008 and pursuant to Resolution No. 3 Series of 2008 and in compliance to a
Deed of Transfer both dated July 28, 2008, there is a need of declaring dividends to
individual stockholders of the corporation as follows: a) for Danny T. Lim, properties
covered by TCTs T-10733, T-11775, T-11659 and T-12634; b) for Wilson T. Lim,
properties as evidenced by TCTs T-8787 and T-11773; c) for Robert T. Lim — cash
amount of money in the total sum of Two Million Two Hundred Pesos
(P2,200,000.00); *(2) d) for Janice Lim-Ong — cash amount of money in the total
sum of Two Million Pesos (P2,000,000.00); and e) for Stephen T. Lim — cash

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 amount of money in the total sum of P2,000,000.00.

In reply, please be informed as follows:

The transfer by the liquidating corporation of its remaining assets to its

stockholders in exchange for the surrender and cancellation of the shares is not a sale,
hence the same is exempt from corporate income taxes, creditable withholding and
documentary stamp taxes under Revenue Regulations (RR) No. 1-90, as amended by
RR 6-2001 and further amended by RR 17-2003. (BIR Ruling Nos. 059 dated April
17, 1990 and 092-99 dated July 8, 1999) Thus, a liquidating corporation does not
realize gain or loss in partial or complete liquidation. (W.P. Fox & Sons, Inc.,
Petitioner vs. Commissioner of Internal Revenue, Respondent, 15 BTA 115; Jordan
Petroleum Company, 13AFTR 2d 1692 (227 F. Supp. 174); JTS Brown & Son
Company vs. Commissioner of Internal Revenue, 10TC 840) Conversely, neither is a
liquidating corporation subject to tax on its receipt of the shares surrendered by its
shareholders pursuant to a complete or partial redemption. (BIR Ruling No. 171-92
dated May 28, 1992)

In addition, Sec. 189 of Regulations No. 26, otherwise known as the

Documentary Stamp Tax Regulations, provides:

"Section 189. Conveyances by corporation to owner of all the

capital. — A conveyance of real estate by a corporation without valuable
consideration to an owner of all its capital stock in consequence of its
dissolution is not subject to tax." SECATH

Under the above-quoted Section 189 of Regulations No. 26, a conveyance

distributing in liquidation the assets of a corporation consisting of real estate without
consideration to the majority owner of its capital stock is not subject to the
documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as
amended. Accordingly, the distribution in liquidation of the assets of a corporation to
its stockholders is not subject to the documentary stamp tax prescribed under Section
196 of the Tax Code of 1997. (BIR Ruling No. 059-90 dated April 17, 1990).

Since the conveyance by DAGLSI of its real properties as liquidating dividends

to its stockholders is without valuable consideration and was not made in the course of
trade or business, the same is not subject to the 12% VAT under Section 106 (A) of
the Tax Code of 1997.

Moreover, Sec. 8 of RR No. 6-2008 is quoted as follows:

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 "SEC. 8. Taxation of Surrender of Shares by the Investor Upon
Dissolution of the Corporation and Liquidation of Assets and Liabilities of
said Corporation. —

Upon surrender by the investor of the shares in

exchange for cash and property distributed by the issuing
corporation upon its dissolution and liquidation of all assets
and liabilities, the investor shall recognize either capital gain or
capital loss upon such surrender of shares computed by
comparing the cash and fair market value of property received
against the cost of the investment in shares. The difference
between the sum of the cash and the fair market value of
property received and the cost of the investment in shares shall
represent the capital gain or capital loss from the investment,
whichever is applicable. If the investor is an individual, the rule
on holding period shall apply and the percentage of taxable
capital gain or deductible capital loss shall depend on the
number of months or years the shares are held by the investor.
Section 39 of the Tax Code, as amended, shall herein apply in
all possible situations.

The capital gain or loss derived therefrom shall be

subject to the regular income tax rates imposed under the Tax
Code, as amended, on individual taxpayers or to the corporate
income tax rate, in case of corporations."

Also, in BIR Ruling No. 039-02 dated November 11, 2002, the Commissioner
had ruled that the liquidating gain, i.e., the difference between the fair market value of
the properties received vis-à-vis the cost basis of the shares to the stockholders,
derived by an individual stockholder who is a citizen or a resident alien is subject to
ordinary income tax rates prescribed under Section 24 (A) (1) of the Tax Code of
1997, as amended, or under Section 25 (A) (1) and B thereof, in case of a non-resident
alien individual. Applying the foregoing, the gain, if any, derived by the stockholders
shall be subject to the regular income tax imposed under Section 27 of the 1997 Tax
Code, as amended.

Likewise, the sale by the stockholder/s of DAGLSI of the distributed asset

received by him/them as return of investment immediately after title thereto is
transferred to his/their names shall be subject to the final capital gains tax imposed
under Sections 24 (D) (1) or 27 (D) (5) of the Tax Code of 1997, as the case may be.

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 (BIR Ruling No. 021-89 dated February 1991)

Finally, the capital gain so realized shall be subject to income tax at the rates
prescribed under Section 27 of the Tax Code of 1997, as amended, and that pursuant
to Section 39 (B) of the same Code, only 50% of the said capital gain is reportable for
income tax purposes if the shares were held by the individual stockholders for more
than 12 months and 100% of the capital gain if the shares were held by the individual
stockholders for not more than 12 months. SIHCDA

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be ascertained that the facts are different, then
this ruling shall be considered as null and void.

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

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 Endnotes

1 (Popup - Popup)
* Copied verbatim from the official copy. The phrase "parcel land" should read as
"parcel of land."

2 (Popup - Popup)
* Note from the Publisher: Copied verbatim from the official copy.

Copyright 2013 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2012 6