BIR Ruling

August 13, 1976 Atty. Leonardo A.. Aurelio Certified Public Accountant 8th Floor, Rufino Bldg. Ayala Ave., Makati, Rizal S i r : This refers to your letter dated April 14, 1976 requesting opinion based on the following facts. cdta It appears that X corporation was established in 1946, and it was authorized to issue 10,000 no par shares. Upon its organization, 2,000 no par shares with a stated value of P100 per share was subscribed. Out of the said 2,000 shares, Y corporation (a non-resident foreign corporation) subscribed to 1,960 shares. In 1971, X corporation declared a 100% stock dividend, and, thus, the total issued shares in X corporation reached 4,000. Again in 1972 another 100% stock dividend was declared as a consequence of which 8,000 out of the 10,000 authorized shares were issued. Moreover, the stated value of each non-par was modified to P1,000 per share. In 1974, the Articles of X corporation was amended by converting the no-par shares with par value, i.e., 10,000 shares at P1,000 for each share. By such conversion, the authorized capitalization of X corporation was fixed at P10M. And, by a stock split at 2 for 1, or, 2 shares with par value of P500 per share for 1 share at P1,000, but without any change in the authorized capital stock of X corporation was increased from 10,000 (with par value at P1,000) to 20,000 (with par value of P500). In 1974, Y corporation sold a portion of the shares it had received by way of stock dividends, but retained all of its original shares (as converted to shares with par value and further converted to its appropriate number as a result of said stock split). On the basis of the foregoing, opinion is requested on the following: "(1) Is the sale of Y corporation of its X corporation shares, which was acquired in 1971 and 1972 as stock dividends, subject to capital gains tax or stock transaction tax? "(2) Does the BIR Ruling dated October 1, 1967 which provides that 'in case of recipient sells a non-taxable stock dividend, the date basis for determining the holding period for capital gain and loss purposes is the date basis of the old share' have any pertinence or applicability to the above transaction? "(3) Does the above transaction fall under any of the exceptions?" In reply, I have the honor to inform you as follows: (1) The sale by Y corporation of its X corporation shares which was acquired in 1971 and 1972 as stock dividends is subject only to stock transaction tax. This is in accordance with the opinion of the Secretary of Finance dated December 15, 1970 which states that stock dividends issued on or after November 5, 1970, are, when sold, subject to 2% (now 1/4 of 1%) stock transaction tax, and, therefore, the gain to be derived therefrom shall be exempt from income tax. Consistent with the opinion of the Secretary of Finance, this Bureau, on January 16, 1975, had also ruled, on the basis of facts similar to the present transaction, that the selling price of stock dividends is subject only to stock transaction tax, the same having been acquired by the seller after November 5, 1970. It should be emphasized, however, that said ruling shall apply only upon proof that what Y corporation sold in 1974 were its shares of stock in X corporation which were acquired as a stock dividends in 1971 and 1972. It may be stated in this connection that the fact that the shares of no par value have been converted into shares of with par value of P1,000.00 per share, which were later split into two (2 for 1 share) with a par value of P500.00 per share, will not change the date of acquisition of the shares sold in 1974. In other words, if the shares sold in 1974 were originally the shares of no par value issued in 1946, but which were converted into shares with par value of P1,000.00 after November 5, 1970 and later split into two (2 shares for every one share), with a par value of P500.00 per share, the latter shall nevertheless be considered acquired in 1946 and therefore, gain shall be recognized if said shares are sold or exchanged. However, as hereinbefore stated, the stock dividends received by Y corporation in 1971 and 1972 are deemed acquired on the dates said stock dividends were issued. (2) BIR Ruling dated October 1, 1967 merely prescribes the reckoning date for the purpose of determining the "holding period" of a stock acquired by the shareholder as a non-taxable stock dividend, the result of which will determine whether 100% of the gain or loss or only 50% thereof shall be considered for income tax purposes. As the stock dividends in question were received by Y corporation in 1971 and 1972 and sold in 1974, and inasmuch this Office has ruled that sales of stocks acquired as dividends after November 5, 1970 are subject only to the stock transaction tax, it is obvious that the aforementioned ruling finds no application in this case. (3) We assume that the "exceptions" referred to in your query are those mentioned in Section 4 of Republic Act No. 6141 and if this is so, our answer to the first query renders as we are of the view that the present transaction is neither covered by any of the five exceptions enumerated in Section 4 of the Republic Act No. 6141 nor by excepting proviso in the same provision which reads: "provided, that, in case of gain not arising from but realized out of said stock transaction the pertinent provisions of this Code shall apply." aisa dc Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3