Tax Consequence of the Required Additional Funds for Conducting Business

June 13, 1989 BIR RULING NO. 127-89 28 270-87 127-89 Gentlemen : This refers to your letter dated May 10, 1989 stating that your client, Planters Products, Inc. (PPI) is indebted to Planters Foundation, Inc. (PFI) in the approximate amount of P827 million, which it intends to liquidate as follows: 1. PFI will surrender its credit from PPI of approximately P827 million in exchange for fully paid shares in PPI with a total par value of P32 million; 2. The difference of P794 million contributed by PFI in excess of the par value of PPI shares shall be credited to the surplus account and reflected as paid-in surplus in the books of PPI; 3. PPI's indebtedness to PFI after the conversion swap will be fully paid and discharged. that the aforementioned manner of liquidation is brought about by the mandate under Letter of Instruction No. 178 dated March 28, 1974 requiring the dispersal of PPI's shares to farmers/fertilizer users and which the Secretary of Justice under its Opinion No. 153-S-198 dated August 1, 1988 has stated that PPI must comply with. In connection therewith, you now request confirmation of your opinion that the difference of P794 million contributed by PFI in favor of PPI represents additional contribution of the former to the latter's capital account in the form of paid-in surplus without the need for PPI to issue additional shares and as such is not subject to income tax and to the donor's gift tax imposed under Sections 28 and 91 both of the Tax Code. In reply thereto, please be informed that "where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary pro rata 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 a part of the operating capital of the company." (Sec. 56, Revenue Regulations No. 2) Such being the case, the amount of P794 million contributed by PFI in favor of PPI represents additional capital contribution, i.e. a capital investment which is not included within the purview of the term "taxable income" as defined in Section 27 in relation to Section 28 of the Tax Code; hence the amount of P794 million contributed by PFI to PPI is not subject to income tax as well as to the donor's tax. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner