November 11, 2002

BIR RULING NO. 039-02 *(1)

000-00
Puyat Jacinto & Santos
12/F Manilabank Building
6772 Ayala Avenue
Makati City
Attention: Atty. David B. Puyat
and
Atty. Virginia B. Viray
Gentlemen :
This refers to your letter dated July 24, 2001 on behalf of your clients, TA
Bank of the Philippines, Inc. ("TA") and The Manila Banking Corporation
("TMBC"), the pertinent portion of which is quoted as follows:
"TA is a corporation organized and existing under Philippines laws,
engaged primarily in commercial banking, and with principal address at the
Grd. Floor Octagon Bldg., Emerald Avenue, Ortigas Center, Pasig City.
"TA has a total authorized capital of Five Billion Pesos
(PhP5,000,000,000.00) divided into Twenty Five Million (25,000,000)
common shares and Twenty Five Million (25,000,000) preferred shares,
each with a par value of PhP100.00 per share.
"Its outstanding capital consists of One Billion Two Hundred Fifty Million
Pesos (PhP1,250,000,000.00), divided into PhP625,000,000 in preferred
shares 1 and PhP625,000,000 in common shares 2 .
"All of the outstanding shares of TA are wholly owned by TMBC and its
nominees.
"TMBC is likewise a corporation organized and existing under Philippine
laws, engaged in business primarily as a thrift bank, and with principal
address at the TMBC Building, 6772 Ayala Avenue, Makati City 1226,
Metro Manila.
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"TA is planning to decrease its authorized capital stock to 1,129,020

common shares, with a par value of PhP100.00 per share, and a total value
of One Hundred Twelve Million Nine Hundred Two Thousand Pesos
(PhP112,902,000.00) ["Plan"].
"Under the Plan, all of TA's outstanding preferred shares, and 5,120,980 of
its outstanding 6,250,000 common shares shall be surrendered by TMBC
and cancelled immediately upon approval by the TA stockholders, the
Securities and Exchange Commission ("SEC") and the Bangko Sentral ng
Pilipinas ("BSP") of the said decrease.
"In exchange for the surrender of the abovesaid shares by TMBC, TA shall
transfer to TMBC both real and personal, tangible and intangible properties
listed hereunder, and referred to hereinafter as "Distributed Assets."
LIST OF DISTRIBUTED ASSETS
A.

LOAN PORTFOLIO 3
(Amounts in Thousand)

ACCOUNT NAME

BALANCE OF PRINCIPAL
AS OF MAY 31, 2001

ANDRES BORJA
ATLANTA GROUP
PHILIPPINE WIRELESS
MONDRAGON
MARICHRIS/MA. THERESA
GOTESCO
SUSAN LIM
E. UYTIEPO
GEORGE GO
FIL-ESTATE LAND
ASIAN GLOBE
IPII
ACTIVE REALTY
METROPOLITAN
FIL-ESTATE LAND
J. RODRIGUEZ III
REYNOLDS PHIL.
LA. FIRMACION
DJJ & SONS
EL BUEN ASENSO
LU FIRMACION
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5,000
91,563
47,231
31,667
65,000
190,000
5,000
2,600
44,531
6,928
77,990
44,536
13,251
1,613
200,000
30,000
6,576
2,744
22,397
17,100
6,800
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JAIME CANCIO
C. QUIAMBAO
R. RUBIO
A. DOMINGO
AMA COMPUTER
ATSUSHI HARADA
CONCEPCION, PS
DAVID DALISAY
DE ROCA, DARLITO
DE ROCA, RIC
MICLAT, ROMY & ANICETA
CORTEZ, FELIX & MARISSA

TOTAL

300
2,954
906
300
925
1,094
186
870
925
650
186
840

922,663

=====
B.

ACQUIRED ASSETS

FORMER OWNER

DESCRIPTION/LOCATION

Active Realty Dev't Corp. 146 lots located at Town & Country Southville,
Bian, Laguna with a total area of 23, 604 sq.m.
9 lots located at Town & Country Southville,
Bian, Laguna with a total area of 1,193 sq.m.
6 lots located at Town & Country North Marilao,
Bulacan with a total areas of 2,696 sq.m.
8 Mount Malarayat Golf & Country Club shares

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Agusan River

Lot with residential building located at #57 12th

Street, New Manila, Quezon City with lot area of
1,001.5 sq.m.

DJJ and Sons

5 units located at the 14th Flr. World Trade

Exchange Center, Juan Luna St., Binondo

Fil Estate Land, Inc.

A parcel of land situated in dela Paz, Antipolo,

Rizal with a lot area of 473 sq.m. and covered by
TCT-361115
12 lots situated in Parkridge Estate Phase V
Antipolo, Rizal (5,757.50 sq.m.)
6 lots situated in Sherwood Hills, Trece Martires
City, Cavite (4,254 sq.m.)

Ladislao Firmacion

A parcel of land along Francisco Road, Brgy.

Francisco with area of 1,173 sq.m.

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Gotesco Properties

148 lots located at Calamba, Laguna

Gloria Lanuza

2 storey old residential building at no. 348

Nanirahan St., Villarica Subdivision,
Mandaluyong City with lot area of 298 sq.m.

Gallardo Lopez

2 storey residential building located at #20-B Jose

Abad Santos St., Bayview Subd., Paraaque City
with lot area of 553.45 sq.m.

Ma. Theresa Commercial

State Theater Building (5 storey) located at Rizal

avenue, Sta. Cruz, Manila with lot area of 1,238.67
sq.m.

Metropolitan Land Corp.

4 CCTs located at the 11th Flr., Trafalgar Plaza

HV dela Costa St., Salcedo Village, Makati City
with total area of 913.20 sq.m.

Meridien Dev/t. Inc.

A parcel of land located at lot 2, Blk. 7, Fort

Bonifacio Global City, Taguig, Metro Manila with
area of 1,600 sq.m.

C.

REAL ESTATE PROPERTY

DESCRIPTION/LOCATION
Upper Ground, Unit 2, World Trade
Exchange Building, No. 215 Juan Luna
St., Binondo, Manila with area of
294.72 sq.m.
with 2 parking slots

Based on the foregoing, you now request a confirmation of your opinion

that:
"1. TA shall not be liable for income tax either for its receipt of the
surrendered shares, or its transfer of the Distributed Assets to TMBC as
liquidating dividends.
"2. No documentary stamp tax under Section 176 of the Tax Code
is due on the surrender by TMBC of the TA shares and the subsequent
cancellation thereof.
"3.
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The transfer by TA to TMBC of real property as liquidating

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dividend is not subject to documentary stamp tax on sale or transfer of real

property under Section 196 of the Tax Code.
"4. Transfer by TA of its Loan Portfolio to TMBC is not subject to
documentary stamp tax under Section 180 of the Tax Code.
"5. The transfer or assignment of any mortgage which stands as
security for TA's Loan Portfolio shall be subject to documentary stamp tax
under Section 195 of the Tax Code, based on the outstanding balance of the
original loan.
"6. TMBC shall realize capital gain or loss when it surrenders its
shares in TA in exchange for the assets distributed by TA as liquidating
dividends, and such capital gain or loss shall be subject to final tax under
Section 27(D)(2) of the Tax Code."

In reply, please be informed as follows:

1. TA shall not be liable for income tax either on its receipt of the surrendered
shares, or its transfer of the Distributed Assets to TMBC as liquidating dividends.
In BIR Ruling No. 171-92 dated May 28, 1992, this Office ruled that the
transfer by the liquidating corporation of its remaining assets to its stockholders is
not considered a sale of these assets. Thus, a liquidating corporation does not
realize gain or loss in partial or complete liquidation. (W.P. Fox & Sons, Inc.,
Petitioner v. Commissioner of Internal Revenue, Respondent, 15 BTA 115; Jordan
Petroleum Company, 13 AFTR 2d 1692; 227 F. Supp. 174; J.T.S. Brown & Son
Company v. Commissioner of Internal Revenue, 10 TC 840, cited in BIR Ruling
No. 196-010-90-059-90 dated April 17, 1990).
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
liquidation (BIR Ruling No. 171-92, supra).
Accordingly, TA Bank is not liable for income tax on either the transfer of
its assets to its stockholders, or on its receipt of the shares surrendered by the
shareholder, TMBC.
2. No documentary stamp tax ("DST") is due on the surrender and cancellation
of the TA shares.
The Tax Code of 1997 imposes a DST on the sale, assignment or transfer of
shares of stock under Section 176 thereof, which in part reads:
"Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or
transfer of due-bills, certificates of obligations or shares or certificates of
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stock. On all sales, or agreements to sell, or memoranda of sales, or

deliveries, or transfer of due-bills, certificates of obligations, or shares or
certificates of stock in any association, company or corporation, or transfer
of such securities by assignment in blank, or by delivery, or by any paper or
agreement, or memorandum or other evidences of transfer or sale whether
entitling the holder in any manner to the benefit of such due-bills,
certificates of obligation or stock, or to secure the future payment of
money, or for the future transfer of any due-bill, certificate of obligation or
stock, there shall be collected a documentary stamp tax of One peso and
fifty centavos (P1.50) on each Two hundred pesos (P200.00), or fractional
part thereof, of the par value of such due-bill, certificate of obligation or
stock. . . ." (emphasis supplied)

No DST under the above quoted provision shall be due on the surrender by
TMBC of the shares of stock to TA. The surrender of the shares does not
constitute a sale, assignment or transfer because TA is not taking title to the
surrendered shares, and the shares are retired and not retained as treasury shares.
In effect, TA does not realize any benefit, as owner or otherwise, from its receipt
of the shares.
3. Transfer by TA to TMBC of real property is not subject to DST on sale or
transfer of real property.
Section 189 of Revenue Regulation No. 26, otherwise known as the
"Documentary Stamp Tax Regulations" provides, viz:
"SEC. 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." (Emphasis & italics supplied)

Under the above-quoted provision, a distribution in liquidation, without

consideration, of the assets of a corporation consisting of real estate is not subject
to DST imposed under Section 196 of the Tax Code of 1997. Accordingly, the
distribution of the assets of TA, consisting of among others, parcels of land, to its
controlling and sole stockholder, TMBC, without monetary consideration, is not
subject to DST as prescribed under Section 196 of the Tax Code of 1997. (BIR
Ruling No. DA-214-96 dated June 26, 1996 and BIR Ruling No. 092-99 dated July
8, 1999 citing BIR Ruling No. 059-90.) In addition, Section 196 of the Tax Code
speaks of "all conveyances, deeds, instruments, or writings, . . ., whereby any land,
tenement or other realty sold shall be granted, assigned, transferred, or otherwise
conveyed to the purchaser, or purchasers, or to any other person designated by
such purchaser or purchasers, . . .". Since it has been held that a corporation that
distributes its assets to its shareholders as liquidating dividends is not deemed to be
selling such assets to the latter, then Section 196 of the Tax Code of 1997 shall not
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apply. However, the notarial certification on this deed or deeds of assignment is

subject to the documentary stamp tax of P15.00, pursuant to Section 188 of the
Tax Code of 1997.
4.

Transfer by TA of its Loan Portfolio to TMBC is not subject to DST.

The pertinent provisions in the Tax Code of 1997 as regards this issue are
as follows:
"Sec. 180. Stamp tax on all bonds, loan agreements, promissory notes,
bill of exchange, drafts, instruments and securities issued by the
Government or any of its instrumentalities, deposits substitute debt
instruments, certificates of deposits bearing interest and others not
payable on sight or demand. On all bonds, loan agreements, including
those signed abroad, wherein the object of the contract is located or used in
the Philippines, bills of exchange (between points within the Philippines),
drafts, instruments and securities issued by the Government or any of its
instrumentalities, deposit substitute debt instruments, certificates of
deposits drawing interest, orders for the payment of any sum of money
otherwise than at sight or on demand, on all promissory notes, whether
negotiable or non-negotiable, except bank notes issued for circulation, and
on each renewal of any such note, there shall be collected a documentary
stamp tax of P0.30 on each P200.00, or fractional part thereof, of the face
value of any such agreement, bill of exchange, draft, certificate of deposit
or note. . ." (emphasis supplied)
SEC. 198. Stamp tax on assignments and renewals of certain
instruments. Upon each and every assignment or transfer of any
mortgage, lease or policy of insurance, or the renewal or continuance of
any agreement, contract, charter, or any evidence of obligation or
indebtedness by altering or otherwise, there shall be levied, collected and
paid a documentary stamp tax, at the same rate as that imposed on the
original instrument. (emphasis supplied)

The above-quoted Sections clearly provide for the imposition of DST on the
renewal or continuance of loan agreements and promissory notes. In the instant
case, DST shall not be imposed on the assignment by TA of its Loan Portfolio
(loan agreements and promissory notes) to TMBC, since the same is not for
renewal or continuance (BIR Ruling No. 139-97 December 29, 1997). The term
"assignment or transfer" in Section 198 of the Tax Code of 1997 applies only to
"mortgage, lease or policy of insurance". Thus, in BIR Ruling No. 041-86 dated
April 8, 1986, this Office defined the term "renew" within the context of Section
198 of the Tax Code of 1997 as follows:
". . . One of the definitions of the word "renew" found in Webster's New
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International Dictionary is: "To grant or obtain extension of; to continue in

force for a fresh period; as to renew a note or a bond". As commonly used
with reference to notes and bonds, the word "renewal" imports a
postponement of the maturity of the obligation dealt with, an extension of
the time in which that obligation may be discharged. (Emphasis supplied,
Campbell River Timber Co. v. Vierhus, 198 American Law Reports, 763;
86 F. (2d) 673) In other words, the term "extension" has the same
connotation as "renewal" which means the continuance of the old
obligation."

5. Transfer or Assignment of any mortgage which stands as security for TA's

Loan Portfolio shall be subject to DST.
Pursuant to Section 198, as above quoted, the assignment of any mortgage
shall be subject to DST at the same rate as the original document.
Under Section 195 of the 1997 Tax Code, on every mortgage or pledge of
lands, estate or property, real or personal, there shall be collected a DST at the
following rates:
(a)

When the amount secured does not exceed P5,000.00, P20.00;

(b)

On each P5,000.00, or fractional part thereof in excess of

P5,000.00, an additional tax of P10.00.

Since the DST on mortgage is based on the amount secured, the DST on the
assignment of mortgage, if any, shall be based on the outstanding balance of the
original loan at the time of the transfer or assignment. (BIR Ruling No. 139-97, id.)
6. TMBC shall realize capital gain or loss when TA distributes its assets as
liquidating dividends.
The tax treatment of liquidating dividends depends on the characterization
of the income in the form of such dividends received by shareholders as a result of
the dissolution of the corporation in which they hold shares.
The second paragraph of Section 73 (A) of the Tax Code of 1997 states:
"Where a corporation distributes all of its assets in complete liquidation or
dissolution, the gain realized or loss sustained by the stockholder, whether
individual or corporate, is a taxable income or a deductible loss, as the case
may be."

In the case of Wise & Co., Inc., et al. vs. Bibiano L. Meer, Collector of
Internal Revenue (78 Phil 655 [1947]), the Supreme Court, in interpreting a
similarly worded provision as above cited as in Section 25(a) of Act No. 2833
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("Income Tax Law"), as amended by Section 4 of Act No. 3761 [which is partially
lifted from section 201(c) of the US Revenue Act of 1918], adopted the judicial
construction of the US Supreme Court in the case of Hellmich vs. Hellman (276
US 233), where it was held that the amounts distributed in the liquidation of a
corporation shall be treated as payments in exchange for stock or shares, and any
gain or profit realized thereby shall be taxed to the distributee as other gains or
profits. The Supreme Court also stated that "(W)hen the corporation was dissolved
and in the process of complete liquidation and its shareholders surrendered their
stock to it and it paid the sums in question to them in exchange, a transaction took
place, which was no different in its essence from a sale of the same stock to a third
party who paid therefor".
In BIR Ruling No. 190-84 dated December 21, 1984, the issue raised was
precisely whether the liquidating gain (that is, the difference between the fair
market value of the properties received and the cost basis of the shares to the
stockholders) derived by an individual stockholder is subject to the then 10%/20%
tax rates under Section 34(g) of the then Tax Code or to the graduated income tax
rates under then Section 21(b). This Office ruled that such gain should be subject
to the tax rates under then Section 21(b). The same conclusion was reached in
other rulings of the BIR (BIR Ruling Nos. 322-87 dated October 19, 1987; 136-88
dated April 12, 1988; 021-89 dated February 13, 1989; 270-91 dated December
23, 1991; DA-223-98).
In effect, following the interpretation of these rulings, liquidating gain is to
be treated as the gain from the sale or exchange of shares, consistent with the
decision of the Supreme Court in Wise & Co., Inc., supra, subject, however, not to
the 5%/10% final tax rate under Sections 24(C), 25(A)(3) or (B), 27(D)(2),
28(A)(7)(c) and (B)(5)(c) of the Tax Code of 1997, but to the ordinary income tax
rates provided under Sections 24(A)(1), 25(A)(1) and (B) [that is, the 25% rate],
27(A) or (E), 28(A)(1) or (2) and (B)(1) of the Tax Code of 1997, depending on
the status of the shareholder/stockholder (for instance, whether the shareholder is a
corporation or an individual, resident or non-resident).
Finally, this Office also notes that a similar treatment has been given to
corporate shareholders of a dissolving corporation, in that the liquidating gain
realized is subject to the ordinary corporate income tax rate rather than to the then
10%/20%; or the current 5%/10% final tax rates. (see for instance BIR Ruling
Nos. DA-214-96 dated June 26, 1996 and 171-92 dated May 28, 1992)
This Office also takes note of BIR Ruling No. DA-367-99 dated January
24, 1999 issued under designated authority, and similar rulings where the BIR
departed from the above-mentioned rulings, and ruled that the liquidating gain is
subject to the 5%/10% capital gains tax rate. The basis for this ruling was BIR
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Ruling No. 015-82 dated January 20, 1982, where the BIR held that the liquidating
gain received by individual shareholders is subject to the then 10%/20% final tax,
but, this ruling was effectively overturned in the subsequent BIR Ruling No.
190-84 and many other similar rulings mentioned above. Thus, BIR Ruling No.
DA-529-99 and rulings similar to it have no basis, having been based on a ruling
that had already been revoked.
Accordingly, this Office rules once and for all that:
1.

Liquidating gain or loss is in the nature of capital gain or loss,

as the case may be, and therefore treated in the manner stated in
Section 39 of the Tax Code of 1997.

2.

Liquidating gain, while characterized as gain from sale or

exchange of shares, is subject to the ordinary income tax rates
provided under Sections 24(A)(1)(c), 25(A)(1), 27(A) and (E),
28(A)(1) and (2) and (B)(1) of the Tax Code of 1997,
depending on the status of the shareholder, and not to the
5%/10% final tax.

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.

Very truly yours,

(SGD.) GUILLERMO L. PARAYNO, JR.

Commissioner of Internal Revenue
Footnotes
1.
2.
3.

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Divided into 6,250,000 shares, with par value of P100.00 per share;
Divided into 6,250,000 shares, with par value of P100.00 per share;
Transfer shall include interest accrued or to be accrued on the loan.

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Endnotes
1 (Popup - Popup)
This ruling has been reversed and set aside by the Commissioner of Internal Revenue
in BIR Ruling No. 479-11 dated 5 December 2011.

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