Change in the Equity of the Stockholders and Non-taxability of Stock Dividends

No date supplied BIR RULING NO. 157-58 Messrs. Sycip, Gorres, Velayo & Co. Manila Gentlemen : Reference is made to your letter dated March 5, 1958, stating the following facts: "Your client, H. H. Bayne Adjustment Co., Inc., has a paid-up capital of P20,000.00 consisting of 2,000 shares with a par value of P10.00 each. It now proposes to declare a 50% stock dividend. To comply with the Securities and Exchange Commission request not to issue fractional shares, it now proposes to give stockholders who may be entitled to such fractional share the option of one of the following: 1) Receive the equivalent of the fractional share in cash, or 2) Pay the corporation the balance necessary to complete one share. "As a result of the above, some stockholders may be issued more shares as stock dividends than what they are entitled to and their equitable interest in the corporation may slightly change." You now request this Office for a ruling on the following points: 1. Whether or not those minor changes resulting from either of the above-stated options would be considered as a change in the equity of the stockholders for income tax purposes and subject the entire stock dividend to tax as if it were a cash dividend. 2. Whether or not the stock dividends would be considered nontaxable if the corporation decides just to cancel any fractional shares without giving the stockholders either of the above-stated options. LLjur In reply thereto, I have the honor to inform you that, inasmuch as the change in the equitable interest of the stockholders in the corporation, which will result from their exercise of either of the two aforesaid options will be very slight and will not substantially alter their proportional interest, nor will such proportional interest of the stockholders be essentially different from their former interest, the entire stock dividend proposed to be declared by your client is not taxable for income tax purposes, except that the cash payment of the fractional share should be treated as cash dividends. Likewise, said stock dividends will not be taxable even if the corporation decides to cancel any fractional shares without giving the stockholders either of the aforesaid options, the change resulting from such cancellation not being so material or substantial as to distort the equity of the stockholders in the corporation. Very truly yours, (SGD.) JOSE ARAAS Commissioner of Internal Revenue