BIR Ruling

October 23, 1972 Mr. Efren A. Pacis Treasurer, Menzi Development Corporation P. O. Box No. 603, Manila S i r : This has reference to your query relative to Revenue Memorandum Circular No. 17-71 dated July 12, 1971 which considers preferred shares as capital regardless of the conditions under which such shares are issued and the dividends or "interests" paid thereon will no longer be allowed as deduction from the gross income of the corporation. However, corporations are given up to December 31, 1971 within which to convert the preferred shares, claimed to represent indebtedness, into actual certificate of indebtedness. You would like to be advised whether or not dividends or interest accruing to preferred shares until December 31, 1971 are deductible for income tax purposes. In reply thereto, I have the honor to inform you that unless the preferred shares allegedly representing indebtedness were converted into actual certificates of indebtedness on or before December 31, 1971 pursuant to the aforementioned Revenue Memorandum Circular, the alleged interest thereon that have been accrued or have been paid during the taxable year 1971 shall be considered dividends and not interest expense and, therefore, not deductible from the gross income of the corporation issuing the preferred shares. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue