BIR Ruling

December 8, 1975 Metropolitan Insurance Company Elizalde Building 141 Ayala Avenue, Makati, Rizal Attention: Mr . G . A . Reedyk Gentlemen : In reply to your letter dated November 17, 1975, I have the honor to inform you that there are no specific limitations with respect to investments which may be made by the trustees of an employees trust. Generally, the fund may be used by the trustees to purchase any investments permitted by the trust agreement. However, the exemption of the trust income under Section 56(b) of the National Internal Revenue Code, as amended, may be denied if the trust (a) lends any part of its income or corpus without adequate security and a reasonable rate of interest; (b) pays any compensation in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered; (c) makes any part of its services available on a preferential basis; (d) makes any substantial purchase of securities or any other property for more than adequate consideration in money or money's worth; (e) sells any substantial part of its securities or other property, for less than an adequate consideration in money or money's worth; or (f) engage in any other transaction which results in a substantial diversion of its income or corpus, to or from the employer or, if the employer is an individual, to or from a member of the family of the employer, or to or from a corporation controlled by the employer through the ownership directly or indirectly, of 50% or more of the total combined voting power of all classes of stock entitled to vote or 50% or more of the total value of shares of all classes of stock of the corporation. (Sec. 5 Rev. Reg. No. 1-68 dated March 25, 1968) aisa dc The primary purpose of benefiting employees or their beneficiaries must be maintained with respect to investments of the trust funds as well as with respect to other activities of the trust. This requirement, however, does not prevent others from also deriving some benefit from a transaction with the trust. For example, a sale of securities at a profit benefits the seller, but if the purchase price is not in excess of the fair market value of the securities at the time of the sale and the applicable investment requisites set forth below have been met, the investment is consistent with the exclusive benefit-of-employees requirement. The requisites are: 1. The cost must not exceed fair market value at time of purchase; 2. a fair return commensurate with the prevailing rate must be provided; 3. sufficient liquidity must be maintained to permit distributions in accordance with the terms of the plan; and 4. The safeguards and diversity that a prudent investor would adhere to must be present. However, the requirement set forth in item (2) with respect to a fair return is not applicable to obligatory investments in employer securities in the case of a stock bonus plan. (See Rev. Ruling 69-65, I.R.B. 1969-7, 9 (modifying Rev. Rul. 57-372, 1957-a CB 256). (par. 2607.70 CCH ' 70 Vol. 3) Accordingly, if the price of P130.00 per share of the 5,556 shares of stock of the Elizalde Rope Factory, Inc. (the employer in this case) which the trustee of the employees trust of the Elizalde Rope Factory, Inc. and its sister corporations is contemplating to purchase is the fair market value of said shares, then the investment is not deemed to be consistent with the purpose of the trust which is part of a plan of an employer for the exclusive benefit of his employees or their beneficiaries. Very truly yours, (SGD.) EFREN I. PLANA Acting Commissioner of Internal Revenue TAN 1456-040-3