BIR Ruling [DA-737-06]

December 20, 2006 BIR RULING [DA-737-06] APIC DA-139-2004 Rural Bank of Rosales, Inc. (ROSBANK) Rizal Street, Poblacion, Rosales, Pangasinan Attention: Mr. Andres M. Cornejo Chairman & CEO Gentlemen : This refers to your letter dated February 2, 2004 requesting for a ruling that the transfer of real properties by the Spouses Condrado and Sergia Estrella in favor of Rural Bank of Rosales, Inc. (ROSBANK) representing additional infusion of capital in the nature of paid-in surplus is not subject to the capital gains tax imposed under Section 24 of the Tax Code of 1997. Documents submitted disclosed that ROSBANK is a domestic corporation duly registered with the Securities and Exchange Commission; that on October 31, 2002, Spouses Condrado and Sergia Estrella executed two (2) separate Deed of Conveyance, whereby they transferred to ROSBANK two (2) parcels of land located in Rosales, Pangasinan; that on the same date, Sergia Estrella executed a Deed of Conveyance whereby she transferred to ROSBANK her paraphernal property also located in Rosales, Pangasinan; that the corresponding fair market value/appraised value of the aforementioned properties are as follows: Property Area & value per sq. m. Valuation A) Paraphernal Property of Sergia Estrella TCT No. 21172 4,871 sq.m. @ P3,000/sq.m. P14,613,000.00 B) Conjugal Property of Spouses Estrella TCT No. 37196 13,910 sq.m. @ P2,000/sq.m. 27,820,000.00 TCT No. 36556} TCT No. 36557} 2,392 sq.m. @ P3,000/sq.m. 7,176,000.00 TCT No. 36558} P49,609,000.00 ============ that the above-listed properties were transferred to ROSBANK as additional consideration in the nature of paid-in surplus for the existing shares of stock issued to Spouses Condrado and Sergia Estrella; that by virtue of said transfer of realties, the book value of the shares of stock owned by Condrado and Sergia Estrella shall be increased accordingly; and that since the transfer of the above properties represents additional infusion of capital in the nature of paid-in surplus, no shares shall be issued by ROSBANK to Condrado and Sergia Estrella. ICTHDE In reply, please be informed that Section 56 of Revenue Regulations No. 2, otherwise known as the "Income Tax Regulations" reads "Sec. 56. Contributions by shareholders . Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary process payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account, will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as part of the operating capital of the company." Consequently, the fair market value of the above realties transferred, as so appraised, being credited to the surplus account of ROSBANK (i.e., additional paid-in capital) being a capital investment, is not within the purview of the term "taxable income" as defined in Section 32 of the Tax Code of 1997. Accordingly, the transfer of the above-listed real properties to ROSBANK by stockholders Condrado and Sergia Estrella, as their contribution to its capital, should not be treated as income on the part of the latter, thus, not subject to income tax. (BIR Ruling No. DA-221-02 dated November 25, 2002, cited in BIR Ruling Nos. DA-117-03 dated April 14, 2003 and DA-139-2004 dated March 26, 2004) On the other hand, Section 185 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations" provides that "Sec. 185. Conveyances without consideration . Conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." AIDTSE Considering that Condrado and Sergia Estrella transferred the above-listed real properties without the corresponding issuance of additional shares of stock in their favor, the foregoing will be considered as contribution of additional paid-in capital, not subject to documentary stamp tax as the above conveyances of realties are without any consideration and are not made in connection with a sale. (DA-139-2004 dated March 26, 2004 citing DA-150-03 dated May 7, 2003) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service