BIR Ruling

November 2, 1970 Messrs. Zulueta & Co. 2nd Floor, Katigbak Bldg. A.. Mabini cor. T.M. Kalaw Sts. Ermita, Manila Gentlemen : This refers to your letter dated September 25, 1970 stating as follows: Your client, California Manufacturing Co., Inc. (hereinafter referred to as California) is indebted to CPC International, Inc. (hereinafter referred to as International) of the United States to the extent of $900,000.00 since 1967. This indebtedness as originally $4,439,787.00, reduced to $1,015,000.72 when International acquired 26,907.8 shares of California. The indebtedness was further reduced to $900,000 when California remitted $100,015.72 to International. This obligation is carried in the books of California at P3,541.500, the peso conversion of the $900,000 at P3.935 to the dollar, the pre-floating rate. California has recently decided to liquidate the obligation by issuing to International 58,815 shares of its capital stock with par value of P100 per share or a total of P5,881,500, the equivalent peso value of $900,000 indebtedness computed at the prevailing floating rate of P6.535 to the dollar resulting in an exchange loss to California of the amount of P2,340,000. Your client is reporting income on the accrual basis. cdta You now ask information as to whether or not your client could claim deduction of the exchange loss for its fiscal period ending September 30, 1970, it having accrued within said fiscal period. In reply, I have the honor to inform you as follows: When foreign currency acquired in connection with transactions in the regular course of business is disposed of, ordinary gain or loss results from the fluctuation. (P = H Federal Taxes, Vol. I par. 6261) Loss on conversion of foreign money received for services rendered is an ordinary loss (The Foundation, Co. 14 TC 1333) The difference between a debt in dollars and amount of dollars used in payment of a business debt was ordinary income (Church English Shoes, Ltd. 24 TC 56) Accordingly, the excess of the peso value of the dollar indebtedness of your client of $900,000 at the time of repayment over its peso value at the time of its acquisition on account of currency fluctuation is a deductible loss in the taxable year when payment thereof was made. It appearing that payment was made within its fiscal year ending September 30, 1970, your clients exchange loss is deductible from its gross income for said fiscal year. cd Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue