BIR Ruling

March 21, 1974 Atty. Benjamin B. Festin Rm. 4, 505 Arquiza Street Ermita, Manila S i r : This refers to your letter dated January 16, 1974 stating that your client, Pioneer Tobacco Corporation stopped and retired from its factory operations (manufacturing of cigarettes) at the close of business hours on December 31, 1973; and that it has in its possession unused stocks of tobacco raw materials which it will dispose of. Under the foregoing circumstances, you would like to be clarified on the following points, viz.: "1. Will the sale or transfer of such tobacco (or any part thereof) by Pioneer unto another manufacturer or factory of cigarettes be exempted from or subject to any internal revenue taxes, fees or charges. "2. Will the transfer of such tobacco (or any part thereof) by Pioneer unto a wholesale leaf tobacco dealer (L-3) which is its tobacco supplier, for the purposes of fully or partially paying and liquidating its outstanding liability to said L-3 dealer for the unpaid price of tobacco purchases, be exempt from or subject to any internal revenue taxes, fees or charges? Would the ruling be the same if the agreed liquidating price of the tobacco is equivalent to its cost, higher than cost or lower than cost, of the tobacco when it was purchased by Pioneer from its supplier-dealer for use in its factory. "3. Will the sale or transfer of such tobacco (or any part thereof) by Pioneer unto an L-3 dealer (not its own supplier) in order to get a better price or for any reason whatsoever other than the liquidation of its liability, be exempt from or subject to any internal revenue taxes, fees or charges." In reply, I have the honor to inform you as follows: The sale by a corporation in liquidation of assets to convert them into cash or as payment in kind to current obligations gives rise to gain or loss. Such disposition must be understood to be at arm's length, so that if made at less than fair market value, the difference may constitute a gift subject to the donor's tax. These rules find application to all of the three (3) instances projected by you. The sale or transfer of the unused stocks of tobacco raw materials by Pioneer after its retirement from business to another manufacturer or cigarettes or to an L-3 dealer exempt from the inspection fee provided that the tobacco raw materials are still in the original bales when they were acquired by Pioneer from L-3 permittees and provided further that said tobacco were already inspected and the corresponding inspection fee paid at the place of origin. However, if the leaf tobacco has already been cut so as to make the same ready for the manufacture of cigarettes, the sale or transfer thereof, unless to one who shall use them in the manufacture of other tobacco products, is subject to the specific tax prescribed in Section 136 of the Tax Code. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5