BIR Ruling [DA-247-96]

July 16, 1996 BIR RULING [DA-247-96] Law Offices of Flores, Duran & Associates 2nd Floor, Doa Yolanda Building 7165-A Marcelo Ave., Marcelo Green Village Paraaque, Metro Manila Attention: Atty . Romeo H . Duran Gentlemen : This refers to your letter dated July 8, 1996 requesting for and in behalf of your client, Integrated Microelectronics, Inc. (IMI), a domestic corporation organized and existing under and by virtue of Philippine laws, with office address at Bo. Cupang, Muntinlupa, Metro Manila, for a confirmation of your opinion that capital losses incurred in the sale of shares of stock in the domestic corporation not listed and traded in the stock exchange, may be offset against capital gains realized from the sale of shares of stock in another domestic corporation likewise not listed and traded in the stock exchange, for purposes of computing the "net capital gain" (subject to capital gains tax at the rates of 10% and 20% under Section 24[e][2][A] of the Tax Code, as amended), or the "net capital loss", as the case may be, as defined under Sections 33(a) (2) and (3) of the Tax Code, as amended. It is represented that IMI was formerly a majority stockholder of Automated Microelectronics, Inc., being the owner of 259,355,000 shares of stock therein, with a par value of P1.00 per share, representing 64.84% of the latter's total outstanding capital stock; that these shares of stock are not listed and traded in the stock exchange; that sometime in August 1993, IMI sold all its shareholdings in Automated Microelectronics, Inc., which had already sustained huge losses in its operations over the years, at that time already amounting to P312,193,559.00; that the substantial losses and huge liabilities incurred by Automated Microelectronics, Inc. (i.e. current liabilities stood at P223,313,855.00) had greatly impaired its capitalization, and had the effect of reducing the book value of the shares to an amount of lower than the original cost, thereby leaving, IMI with no other alternative than to sell all its shareholdings in Automated Microelectronics, Inc. at a price below their original cost; that the shares were subsequently sold at a total price of P20,095,208.00, as a result of which IMI sustained a capital loss amounting to P239,259,792.00; that subsequently, IMI likewise sold its entire shareholdings, consisting of 8,642,300 shares, in IMI Realty, Inc., a wholly-owned subsidiary, in the light of IMI's decision to forego earlier plans to venture into real estate development, and instead to limit its activities to its main business of contract manufacturing/assembling of electronic parts and components for export; that these shares are likewise not listed and traded in the stock exchange; that said shares were sold for the total amount of P120,000,000.00 or at a price of approximately 13.89 per share; and that from this transaction, IMI realized a capital gain in the amount of P111,357,700.00. In reply, please be informed that capital losses incurred by IMI from the sale of its shares of stock in Automated Microelectronics, Inc. may be offset against capital gains realized from the sale of its shares of stock in IMI Realty, Inc. Section 33(c) of the Tax Code, as amended provides that "losses from sales or exchange of capital assets shall be allowed only to the extent of gains from such sales or exchanges". Moreover, Section 33(a) (3)of the same Code defined "net capital loss" as "the excess of the losses from sales or exchanges of capital assets over the gains from such sale or exchanges". Thus in BIR Ruling No. 146-81 dated August 4, 1981 which involves the very same provisions of the Tax Code, this Office ruled that capital losses may be offset against capital gains derived from the sale or exchange of capital assets which may or may not be shares of stocks. (BIR Ruling No. UN-453-95 dated December 27, 1995) Finally, pursuant to Section 24(e)(2)(A) of the Tax Code, as amended, only the "net capital gain", if any, is subject to the capital gains tax of 10% and 20% since the net result of offsetting the capital loss incurred from the sale of Automated Microelectronics, Inc. shares against the capital gain realized from the sale of IMI Realty, Inc., shares will be a "net capital loss." On the other hand, IMI will not be liable for any capital gains tax on the sale of said shares. liblex This ruling is being issued based on the facts as represented. If upon investigation it is found out that the facts are different, then this ruling shall be considered null and void. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)