BIR Ruling

July 11, 1968 MEMORANDUM FOR: The Revenue Operations Head (Special Operations) There is returned to you herewith the entire docket bearing on the income tax case of May Financing Corporation (MFC for short) for the years 1963, 1964, and 1965. LexLib The records of this case show that MFC was organized and duly registered with the Securities and Exchange Commission on May 29, 1963 and began business operations as a financing company in the same year. The Corporation is controlled by the following individuals, namely: Venancio P. Macalino, Felicisimo P. Macalino, Benito P. Macalino, and Anastacia Gueco-Macalino. Venancio, Felicisimo and Benito all surnamed Macalino are brothers and Anastacia Gueco-Macalino is their sister-in-law. Its financing activities embrace general financing, such as discounting of note and accounts receivables. Inspite of its large profits during the years 1963 to 1965, MFC distributed and paid cash dividends only for the year 1964 and in the total amount of P9,776.00 only. The bulk of its gross income for said years consists of interest income and discounting fees derived from discounting of notes and accounts receivables. On the basis of the foregoing findings, our examiners recommended the assessment of 45% surtax on the undistributed net income of MFC for the years 1963 to 1965 in accordance with Section 63 of the Tax Code. prcd The issued presented for resolution in this case, is whether or not the discounting fees or purchase discount is considered interest and/or personal holding company income under Section 65 of the Tax Code. There is no question that more than 50% of MFC's outstanding stocks are owned directly by not more than five individuals during the taxable years investigated. This satisfies the stock ownership requirements prescribed under Section 64 of the Tax Code. As to the gross income requirements, the report of the investigating examiners shows that more than 80% of MFC's gross income in any of the said taxable years consists of interest and discounting fees or purchase discount. Taxpayer, however, contended that pur-discount is not interest, and, therefore, not personal holding company income. In the verification conducted to determine the nature of MFC's income under purchase discount, the report shows that the financing arrangement between MFC, the seller and customers or buyer is such that MFC advances the money for the customers or buyers to purchase the car or appliances, as the case may be, in installment basis. A certain percentage is added to the cash selling price and the total amount constitute the installment selling price. If the buyer makes a cash down payment of the installment sale, a promissory note is executed by the buyer for the balance. The promissory note together with the chattel mortgage and deed of sale duly signed by the customers are delivered to the seller. The seller endorses these documents to MFC who pays the seller the face value of the note minus the percentage added as discounting fees. The MFC collects the face value of the note monthly from the buyer or customer which includes the percentage added; that is, the difference between the cash and the installment selling price, taken up as purchase discount. It has been held that discounting fees realized upon maturity of installment notes receivables is interest income for purposes of personal holding company requirements (International Finance Co., BTA, Memo. Op. Jan. 29, 1941; Montgomery's Federal Taxes, Vol. II, 1946-1947 p. 844 cited in Aranas, Vol. II, p. 362). Scrutinized closely, the financing arrangement between MFC, the customers and the seller is in the nature of collateral loans and the income derived therefrom is a personal holding company income in the form of interest (Sec. 65(a), NIRC). In view of the foregoing, this Office is of the opinion and so holds that the discounting fees or purchase discount in question is a personal holding company income in the form of interest, and that the MFC is a personal holding company subject to 45% surtax under Section 63 of the Tax Code. LibLex (SGD.) MISAEL P. VERA Commissioner of Internal Revenue