What Constitutes Gross Income to Serve as Basis for Paying the 6% Tax as Dealer in Securities under Section 116 of the Tax Code?

February 28, 1991 BIR RULING NO. 038-91 116 72-007 038-91 Gentlemen : This refers to your letter dated September 19, 1989 stating that you are a newly formed corporation engaged in sales and marketing of pre-need plans, specially memorial, educational and pension plans and as such, is classified as a dealer in a securities by the Securities and Exchange Commission (SEC); that existing rules and regulations of the SEC require that a certain percentage of receipts made by pre-need companies from sale of pre-need plans must be set aside and deposited to a trust fund administered by a trust company or bank authorized to perform trust functions; that no withdrawal from said fund is allowed except for paying the cost of services rendered on property delivered, bank charges and investment expenses in the operation of the trust fund, cash surrender/termination value payable to planholders, annuities, contributions to the fund of cancelled plans and taxes on trust fund; and that in your particular case, 70% of the gross receipts have to be deposited to the trust fund and only the remaining 30% is allowed for selling expenses, general administrative expenses and margin for profit. In your subsequent letter dated January 4, 1990, you admitted that under Section 6 of the New Rules on the Registration and Sale of Pre-Need Plans and Similar Contracts and Investments issued by SEC, 40% of the gross pre-need price of the plan, if sold for cash, or certain percentage prescribed in said Section, if sold on installment basis, is being required to be deposited with a trust company, bank or investment house to guarantee the delivery of property or performance of services in the future. However, you contended that the sales are inadequate because your actuarial assumptions call for a higher rate and the cost of acquisition or sales cost normally ranges from 15% to 18% of the selling price. Based on the foregoing, you are requesting a ruling as to what constitutes gross income to serve as your basis for paying the 6% tax as dealer in securities under Section 116 of the Tax Code. In reply, please be informed that for purposes of the percentage tax on dealers in securities, the basis of the tax is the gross income which means selling price less the actual cost or purchase price. (BIR Ruling No. 72-007 dated March 8, 1972 citing Section 43 of Revenue Regulations No. 2) Gross income is synonymous with the term "gross profits" which is defined as gross sales or gross receipts less cost of goods sold. (Black's Law Dictionary, p. 632) Accordingly, that portion of the gross pre-need price of the plan depending on whether the plan is sold in cash or installment which has to be deposited to a trust fund as required by SEC and which cannot be withdrawn, shall still be considered as part of the gross income for purposes of computing the 6% tax. Very truly yours, (SGD.) JOSE U. ONG Commissioner