Principal Stockholder's Contribution Considered as Capital Investment is Not Subject to Income and Donor's Taxes

September 8, 1987 BIR RULING NO. 270-87 28 101 193-87 270-87 Gentlemen : This refers to your letter dated August 6, 1987 stating that you are a domestic financing Company organized and existing under Philippine laws with a paid-up capital of P2,000,000.00 divided into 20,000 shares with a par value of P100.00 per share; that as at the end of December 1986, you had an accumulated losses amounting to P638,113.00; that as a condition for your continued operation, the Securities and Exchange Commission had required you to put in additional capital sufficient to fully cover and wipe out the deficit of P638,113.00; that you are willing to contribute an additional P2,038,113.00 to satisfy the SEC requirement, part of which or P638,113.00 will be used to wipe out the accumulated deficit and the balance of P1,400,000.00 will take the form of additional capital for contribution which shares of stock will be issued; that the principal stockholders of the company are willing to assume the total deficit of P638,113.00 which will take the form of capital contribution without issuing additional shares; and that your books will show the corresponding decrease of the deficit as at end December, 1986 and an increase in the capital contribution of the principal stockholders but without increasing the number of shares issued. You now request confirmation of your opinion to the effect that the amount of P638,113.00 which the principal stockholders will give to the company for the purpose of wiping out the deficit of P638,113.00 constitutes additional capital contribution without the necessity of your issuing additional shares of stock, that the amount of P638,113.00 given to the company will merely increase the basis of the principal stockholders' stock, but not their proportionate equity in the corporation; and that the transaction is not subject to income nor gift taxes. In reply, please be informed that since the amount of P638,113.00 represents additional capital contribution, it is a capital investment which is not included within the purview of the term "taxable income" as defined in Section 28 in relation to Section 29 of the Tax Code, hence, the principal stockholder's contribution consisting of the amount of P638,113.00 is not subject to income tax, as well as to the donor's tax. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner