BIR Ruling

November 8, 1974 Mr. A. Romualdez President Rural Bankers Association of the Philippines RBAP Bldg., Aduana Street Intramuros, Manila S i r : This refers to your letter dated September 19, 1974 requesting tax-exemption of the cash dividends which will be declared by some 207 rural banks and distributed to their respective stockholders to enable them to purchase the preferred shares of the Land Bank of the Philippines in said rural banks under the following circumstances: "Under Monetary Board Resolution No. 833, dated April 26, 1974, the Monetary Board decided as follows: "1. Authorized rural banks to declare dividends out of their surplus reserves set up under Section 242 and 244 of the Revised Rules and Regulations Governing Rural Banks, subject to the following conditions: "a. Dividends to be declared shall be used by the recipient stockholders solely for the purchase of preferred shares of rural banks held by the Land Bank of the Philippines; "b. Aggregate dividends for each stockholder exercising his right of pre-emption shall be within the statutory limitations on bank stockholdings and shall in no case exceed the total par value of the preferred shares to purchased; "c. Dividends so declared shall be made payable and immediately remitted to the Land Bank of the Philippines for the account of the common stockholders concerned; "d. The rural banks concerned must have sufficient surplus reserves and sinking fund to cover the dividends declared for this specific purpose; and "e. The rural bank concerned is in sound financial condition, eligible to receive financial assistance under existing policy, and is complying with Central Bank regulations, policies and instructions, and "2. Authorized rural banks which have set up reserves for the retirement of preferred shares from yearly undivided profits without providing for the corresponding sinking fund for the purpose to declare and pay dividends out of such surplus reserves; provided that they comply with the following conditions: "a. The declaration and payment of cash dividends will not impair the normal operations, particularly the lending operations, of the rural bank concerned; "b. The proceeds from rediscounting and from other Central Bank special financing assistance programs shall not be used in the payment of such dividends; and "c. Prior written approval of the Central Bank shall have been secured before dividends are declared for this purpose." and for the following reasons: "1. While the dividend to be declared is "cash", it is not, strictly speaking, income to the private stockholders because condition No. 1(c) specifically states that the dividends so declared shall be made payable and immediately remitted to the Land Bank of the Philippines for the account of the common stockholders concerned; "2. The dividend partakes the nature of stock dividend because what is credited to the account of the private stockholders is capital stock, representing the preferred shares so purchased from the Land Bank. It will be noted that preferred shares acquired by private individuals are automatically converted to common stock; "3. The special concession has been given to the private stockholders of rural banks only to enable them to purchase the preferred shares of the Land Bank. In effect, therefore, it is the Land Bank which stands to benefit from the cash dividend declaration." In reply thereto, I have the honor to inform you that when a corporation distributes its earnings to its shareholders, the distribution is usually taxable as a dividend. To be subject to income tax, a distribution received by a shareholder must be out of earnings and profits of the distributing corporation. For income tax purposes, the term "dividend" means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings and profits. If a dividend is in cash, the amount of the dividend is the amount of the cash; and, unless otherwise proven to the contrary, these cash dividends are includible in the recipient stockholders' gross income for the year in which they are received or unqualifiedly made subject to the shareholder' demand, regardless of the subsequent use or disposition thereof. (see Sec. 250, Rev. Regs. No. 2; par. 5050, p. 166, 34 Am. Jur. 2nd; pars. 737 & 758, pp. 236 & 243, US Master Tax Guide (1969) In the light of the foregoing, this Office is of the opinion as it hereby holds that the aforementioned cash dividends are taxable income to the recipient stockholders, regardless of whether they will be used in the purchased of Land Bank preferred shares in the distributing Rural Banks. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5