Corporation's "Contemplated Rehabilitation" of the Capital, Not Subject to Internal Revenue Tax

March 6, 1958 BIR RULING NO. 205-58 The Rose Packing Company, Inc. 760 Apelo Cruz, Malibay Pasay City Gentlemen : Reference is made to your letter dated December 4, 1957, requesting our opinion as to whether or not any internal revenue tax will be due on the "contemplated rehabilitation" of the capital of your corporation to be effected as follows: llcd "The Rose Packing Company Inc. was organized before the war and operated up to the outbreak of the war. During that period, it suffered a loss from operation. After liberation in 1950, it was reconstructed and reorganized by reducing the capital to its net book value to wipe out the pre-war losses and the capitalization was again increased to accommodate new subscription at par. Since then it was in operation up to the present, but because of the pioneering nature of the business which is canning of meat and fish, the corporation in all its years of operation suffered losses from operation. Its present authorized capital is P500,000.00 with a paid up capital of P250,486.00. As of Dec. 31, 1956, it has a net deficit of P197,000.00. Because of the precarious financial position of the company at present and to give once more a chance to the corporation to continue operation the stockholders deemed it wise to invite a new group of investors. However, after several efforts to that effect, no new investor is willing to invest at par because the present book value is only about 24% of the original par value. In order to attract the new investor, the stockholders decided to decrease their shares or interest by about P110,454.00 by donating shares of stock to which amount will be applied to reduce the deficit from P197,000.00 to P86,556.00. This reduction will place the net book value of each share to about P0.65, and which at that level the new investor will be willing to subscribe by P75,000.00 at par." In reply thereto, I have the honor to inform you that the re-arrangement of your capital structure to be made in the manner stated above will not subject the corporation or its stockholders to the income tax. No gain or loss shall be recognized where a losing corporation, in order to attract new investors, resorts to the reduction of outstanding stock through donations by the stockholders of part of their shares in equal proportions, such donated shares to be treated as treasury stock and their value to be applied to reduce the deficit. Also, no gift tax will be due if, as represented, the proposed recapitalization shall operate merely to re-arrange continuing interests in the corporate property and no gratuitous transfer of economic benefit from one person to another will be effected thereby. LibLex Very truly yours, (SGD.) JOSE ARAAS Commissioner of Internal Revenue