BIR Ruling

April 19, 1968 Theo H. Davies & Co., Far East, Ltd. P. O. Box 287 Manila Gentlemen : This refers to your letter dated March 20, 1968 requesting legal opinion on the question of whether or not the exchange loss on redemption at the prevailing exchange rate of P3.90 to $1.00 of preferred shares issued by Hawaiian-Philippine Company when the conversion rate was P2.00 for every US S1 is a deductible loss or expense for income tax purposes. You represented that at the end of the war, Hawaiian-Philippine Company was heavily damaged by fire, bombing, and looting that the value of salvage was insufficient to provide security with which to raise adequate reconstruction finance in the form of loans. It was estimated that a total of some P10M would be required, a fact slightly lower than the P11.5M actually spent before the Company came into actual production at the end of 1948. Various means were employed to raise the required funds and one of these was by issue of 7% cumulative preferred stocks subscribed in cash and remitted into this country in dollars by the subscribing stockholders. At the time of the preferred issue, the rate of conversion of the Philippine peso to United states dollar was P2 to $1. It was specifically stipulated in the articles of redemption that the preferred shares would be redeemable by the Company at $5.00 per share in the United States currency. The Company now proposes to redeem the preferred shares at the stipulated US$5.00 per share at the prevailing exchange rate of P3.90 to $1.00. In reply thereto, I have the honor to inform you that the difference between debt in dollars and amount of dollars used in payment of a business debt is ordinary income and not capital gain. (Church's English Shoes, Ltd., 24 TC 56, aff'd. 229 F 2d 957; American Southeast Asia Co., Inc. 26 TC 198; Beamore Corp., par. 56, 10, P-H Memo TC) When foreign currency acquired in connection with transactions in the regular course of business is disposed of, ordinary gain or loss results from the fluctuations. And if the conversion is made in connection with the taxpayer's trade or business, the gain or loss is an ordinary gain or loss. (Prentice-Hall Federal Taxes, Vol. 1, pars. 6261 and 5061) In view thereof, and considering that the alleged loss is sustained in connection with the trade or business of the Hawaiian-Philippine Company as its much needed capital is secured from abroad in order to finance and/or rehabilitate its heavily damaged business, this Office believes and so holds that the difference of P1.90 for every dollar on redemption of the aforesaid company's preferred shares at prevailing exchange rate is deductible as loss from its gross income under Section 30(d)(2) of the Tax Code. iatdc Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue