Definition of the Term "Dealer in Securities"

December 18, 1990 BIR RULING NO. 236-90 20 (u) 116 000-00 236-90 Gentlemen : This refers to your letter dated October 15, 1990 stating that your client, Alakor Corporation (Corporation) was incorporated in 1968 for the purpose of acquiring real estate (including buildings) whether public or private, for the purpose of using, leasing, managing, operating, developing, cultivating and exploiting the same and engaging in the production and sale of agricultural products; that it has investment in shares of stock; that from time to time, it buys, when it has excess funds and it sells, when the prices is right, shares of stock listed and traded in the stock exchanges for its own account and not for the account of others; that it has no established place of business for the purchase and sale of shares and all its stock transactions were done thru its stock brokers; that it is not a member of any stock exchange; and that on the stock transactions, the corporation paid the of 1% stock transfer tax imposed under Section 24 (e)(2)(B) of the Tax Code, as amended which the stockbrokers as the withholding agent withheld and remitted to the Bureau of Internal Revenue. aisadc In connection therewith, you now request a ruling on the following: "1. Considering the history of securities disposition, is the corporation a "dealer in securities" as the term is defined in Section 20 (u) of the Tax Code, as amended; "2. If not, are the gains realized from these securities dispositions considered capital gains subject to the stock transfer tax of of 1% prescribed in Section 24 (e)(2)(B) of the Tax Code, as amended. In reply thereto, please be informed that Section 20 (u) of the Tax Code, as amended defines the term "dealer in securities" as a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. Thus, a "dealer in securities" must have a place of business and are regularly engaged therein (Greenfield vs. Meer, 77 Phil. 394) A securities dealer is comparable to a merchant in that he purchases stock in trade (securities) with the expectation of re-selling at a profit. This profit is expected, not because of a rise in value during the interval of time between the purchase and resale, but merely because the dealer has or hopes to find a market or buyers who will purchase the securities from him at a price in excess of their cost. This excess or mark-up represents remuneration for his labor as a middleman in bringing together buyer and seller and in performing the usual services of retailer or wholesaler of goods. (CCH '86 Vol. 7, par. 53, 851) Accordingly, a person engaged in the trade or business of buying and selling securities on his own account is not a dealer (1963 U.S. Master Tax Guide page 396) Such being the case, and considering that Alakor Corporation has no established place of business for the purchase of shares and their resale to customers; that all its stock transactions were done thru its stockbrokers; and that it is not a member of any stock exchange, it is not therefore considered a "dealer in securities" within the purview of Section 20 (u) in relation to Section 116 both of the Tax Code, as amended. Accordingly, gains realized from the sale of the shares are considered capital gains subject to the tax of of 1% based on the gross selling price of the share or shares of stock sold by it which are listed and traded pursuant to Section 24 (e)(2)(B) of the Tax Code, as amended. 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. cdtech Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner