45% Additional Tax as Personal Holding Company

July 12, 1989 BIR RULING NO. 146-89 24 122-82 146-89 S i r : This refers to your letter dated February 15, 1989 stating that on various dates in 1985, your company, U.S. Automotive Co., Inc., received a total cash dividend of P28,627,605.00 from Bulletin Publishing Corporation; that your company has an authorized capital stock of P20 million; that as of December 31, 1985, your company's issued and outstanding shares amounted to P10,073,250.00; that your company's total liabilities amounted to P129,385,846.11 which is seven (7) times over its retained earnings of P18,087,803.78; that to enable your company to continue its expansion program relative to its real estate and investments business, your company's Board of Directors and stockholders adopted a resolution on December 31, 1985 to increase its authorized capital stock from P20 million to P92 million; that to fully pay the required 25% minimum subscription to the increase of its capital stock or the amount of P18 million, your company declared a stock dividend of P18 million out of its retained earnings of P18,087,803.78 as of December 31, 1985; that due to the desire of your company to further increase its capital stock to P120 million, it delayed the filing of its certificate of increase of capital stock with the Securities and Exchange Commission; that the Board of Directors and stockholders of your company adopted another resolution increasing its authorized capital stock from P20 million to P120 million; that as of December 31, 1986, your company has a surplus of P6,415,376.84; that the entire earned surplus of your company as of December 31, 1985 and 1986 amounted to P24,503,180.62; that your company declared a total stock dividend of 243.25% or P24,503,180.62 to all its stockholders as of December 31, 1986 as part payment of the 25% minimum subscription requirement to its increased capital stock; that the balance of the 25% minimum subscription requirement amounting to P496,819.38 was paid in cash by the stockholders; and that the corresponding stock certificates were issued and distributed to the stockholders entitled thereto worth P25 million after the approval of the increase of capital stock by the SEC on June 22, 1988. cdtech Based on the foregoing representations, you now request a ruling as to whether your company is subject to the then 45% additional tax as personal holding company on its undistributed net income of P18,087,803.78 as of December 31, 1985. In reply thereto, please be informed that based on the documentary evidence submitted, you are a personal holding company within the purview of then Sections 61 and 62 of the Tax Code, as amended. However, the 45% personal holding company tax is based on the amount of the undistributed net income of the personal holding company under then Section 63 of the Tax Code. (Sec. 218, Revenue Regulations No. 2) Considering that as of December 31, 1985, the Board of Directors and stockholders of your company had adopted a resolution increasing its authorized capital stock and that to fully pay the required 25% minimum subscription requirement to the increase of its capital stock or the amount of P18 million, it declared a stock dividend of P18 million out of its retained earnings of P18,087,803.78 as of December 31, 1985. A declaration of a dividend is often spoken of as a "severance" or "setting apart" by the corporation from its assets of a fund to be distributed among the stockholders. The declaration creates an immediate right in the shareholders as a creditor. Thus, after a dividend is declared, the right to the amount becomes vested in the shareholder and is credited to him in the books. The liabilities of the corporation are increased and its surplus or net worth is pro-tanto diminished by the declaration. (See Ballantine on corporations p. 563, Sec. 239, Ch. 58) The P18,087,803.78 retained earnings cannot be considered as undistributed net income of your company as of December 31, 1985 since the same had already been declared to the shareholders as stock dividends as of said year. Moreover, your company cannot be considered to have an undistributed net income for 1985 since its liabilities as of said year were seven (7) times its so called "retained earnings." Such being the case, you are not subject to the 45% personal holding company tax on any undistributed net income. 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. cd Very truly yours, (SGD.) JOSE U. ONG Commissioner