BIR Ruling

September 15, 1975 Messrs. Sycip, Salazar, Feliciano, Hernandez & Castillo 3rd Floor, Far East Building Buendia Avenue Makati, Rizal Attention: Atty . Andres Gatmaitan Gentlemen : This refers to your letters dated August 15, 1975 and September 1, 1975 requesting information on the tax consequence of a transaction described as follows: Company "A" which can be any licensed broker-dealer in marketable securities, such as stocks and bonds, and a member of a local stock exchange desires to engage in the purchase and sale of government securities, another form of marketable securities. Being unfamiliar with government securities, Company "A" seeks the investment advice of your client, the Piso Development Corporation (hereinafter referred to as the Corporation), an investment house duly licensed as a securities dealer and the latter suggests the purchase of a particular type of government bonds. The Corporation sells to Company "A" government securities in the form of government bonds which are traded over-the counter, i. e., not listed in any exchange. The Corporation is the registered owner of these bonds until their subsequent sale to Company "A". The Corporation sells these bonds to Company "A" at a price of P102.45 which includes various service fees and the cost of money in retaining the bonds prior to their sale. Following normal practice, the confirmation of sale of the bonds does not stipulate the components of the price of P102.45. Internally, however, the Corporation computes the price indicating the components thereof, as for instance in a selling price of P102.45, viz: Face value of bonds P100.00 Service fees 2.00 Cost of money in retaining the bonds prior to sale 0.45 P102.45 On the other hand, Company "A", upon acquiring the bonds, effects an accounting entry as follows: Debit: Marketable securities (government bonds) P102.45 Credit: Cash P102.45 On the basis of the foregoing facts, you posed the following queries: 1. What is the acquisition cost of the bonds to Company "A"? 2. If incidental expenses of the purchase of an investment (i. e., P2.45 in the foregoing example) are not capitalized and form part of its cost, can these be charged to current operations as tax-deductible expenses? In reply thereto, I have the honor to inform you that the accounting entries effected by Company "A" is reflective of Company "A"'s acquisition cost of the bonds which is P102.45. In other words, the acquisition cost of the bonds to Company "A" includes all expenditures incidental to the purchase of said bonds, e.g., service fees and cost of money in retaining the bonds prior to the sale. For income tax purposes, the service fees of P2.00 and the cost of money in retaining the bonds prior to the sale in the amount of P0.45 are not deductible by Company "A" as business or operating expenses because they are, in fact, expenses in acquiring the bonds and, therefore, part of cost thereof. acd Very truly yours, (SGD.) CONRADO P. DIAZ Acting Commissioner of Internal Revenue TAN-1182-568-4