Proposed Donations of the Shares of Stock

January 5, 1989 BIR RULING NO. 001-89 94 (3) 000-00 001-89 Gentlemen : This refers to your letter dated September 14, 1988 stating that you are a non-stock, non-profit private foundation duly registered as a donee institution in accordance with the BIR-NEDA Regulations No. 1-81; that there is a proposal to donate to you P30 Million worth of shares of stock of a corporation which is the parent or holding company of 10 prospective donor companies; that the principal condition imposed in the donation is that the Foundation shall immediately sell the donated shares to the employees and/or the Retirement Plan Trust fund of each of the donor companies at fair market value but on easy payment terms (minimum of five years installment payment period); that the proceeds of the sale will be utilized by the foundation in granting financial and other assistance to deserving individuals, acquisition of assets directly connected with charitable; educational and social welfare purposes and the promotion and support of studies and programs, including the expenditure of administrative expenses not exceeding 30% of the receipts. cdtech Based on the foregoing facts, you now request for a clarification on the following issues: 1. Whether or not the proposed donations of the shares of stock will be subject to the donor's tax; 2. Whether or not the donations will be fully deductible from the gross income of the donor companies; 3. Whether the BIR-NEDA rules requiring the Foundation to make a utilization of the donation not later than the 15th day after the close of the foundation's taxable year is satisfied if the utilization is made only when the proceeds are received from the transfer of the donated shares of stock and maintain the collectible balance as a receivable account subject to utilization requirement only upon receipts; 4. Whether or not the transfer of the shares of stock by the Foundation to the employees and/or the retirement plan trust funds of the donor companies be subject to the capital gains tax. In reply, please be informed that donation of shares of stock to you, a BIR-registered donee institution, is exempt from donor's tax pursuant to Section 94(a)(3) of the Tax Code provided that not more than 30% of said donation shall be used by you for administration purposes. For income tax purposes, however, the same donation shall be allowed as deduction only to the extent of 3% of the donor-corporations taxable income derived from business as computed without the benefit of the deduction under Section 29(h)(1) of the Tax Code as amended. This is so because the requirement of full deductibility for income tax purposes, i.e., utilization of the donation not later than the 15th day of the third month after the close of the foundation's taxable year in which the contributions are received, is not satisfied when payment for the sale of shares of stock is made on installment basis spread over a period of 5 years and utilization is to be made only upon receipt of the payment. (Sec. 30(h)(2)(C), Tax Code as implemented by BIR-NEDA Regulations No. 1-81) Finally, your sale of the aforesaid shares of stock to the employees and/or the Retirement Plan Trust Funds of the donor companies shall be subject to the capital gains tax pursuant to Section 24(e)(2) in relation to Section 26 both of the Tax Code, as amended. Very truly yours, (SGD.) JOSE U. ONG Commissioner