BIR Ruling

July 7, 1972 Atty. Felipe L. Gozon Vice-President-Legal Philippine Airlines, Inc. 10th Floor, PAL Building Ayala Avenue, Makati, Rizal S i r : This refers to your letter dated February 4, 1972 requesting a ruling as to the basis of computing the 2% franchise tax payable by the Philippine Airlines, Inc. arising from the disposition of its equipment and assets. In reply thereto, I have the honor to quote hereunder the second paragraph of Section 14 of Act 4721, as amended by Republic Act No. 2360: "The words 'gross receipts', 'revenues' and 'earnings' are herein defined as the total receipts obtained from transportation services or revenues derived from other services or earnings realized from the disposition of equipment by the grantee through its operation under this franchise . "(Emphasis ours) The 'earnings' of a corporation organized for the sale of property mean the net proceeds of the property converted into money. Baldwin v. Miller & Luz, 92 p. 1030, 1934, 152 Cal. 454." (Words & Phrases Perm. Ed. Vol. 14, p. 35). Moreover, in the case of Philippine Power & Development Co., Inc. vs. Commissioner of Internal Revenue, CTA Case No. 1152, October 31, 1965, the Court of Tax Appeals ruled, among others, that profits in the sales of fixed assets are earnings or profits incidental to and necessarily connected with the operation of taxpayer's franchises, hence, includible in its taxable gross earnings. Such being the case, this Office believes, and so holds, that the earnings derived by the airline company from the disposition of said equipment and assets as basis of the franchise tax should be understood to mean the selling price less the acquisition cost thereof. Hence, if the selling price of the equipment and assets disposed of does not exceed the acquisition cost, the airline company is not subject to the franchise tax on the proceeds of the sale. cdta Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue