Tax Consequence of Sales of Preferred Shares of Stock

October 12, 1988 BIR RULING NO. 494-88 24 (e) (2) (A) 000-00 494-88 Gentlemen : This refers to your letter dated September 22, 1988 requesting a ruling as to whether sales of preferred shares of stock of the Philippine Commercial International Bank (PCIBank specifically its Series "E" and "F" Preferred Shares are subject to capital gains tax. It is represented that Revenue District No. 32, East Makati, Metro Manila is contemplating to assess you for capital gains tax under Section 24(e)(2)(A) of the Tax Code, as amended, and as implemented by Revenue Regulations No. 2-82 on your sale of your preferred shares of stock; that PCIBank's Series "E" and "F" Preferred Shares are structured in such a way that their book value can be no higher than their par value plus accrued and unpaid dividends; that since the Series "E" and "F" Preferred Shares are subject to redemption "at any time" at par value plus accrued and unpaid dividends, no investor would buy such preferred shares at a price higher than its par value; that the public offering of PCIBank's Series "E" and "F" Preferred Shares are at a par (face) value of P10.00 per share; that all sales of said preferred shares, past and present have been and are being transacted at their par value; and that preferred shares are not being traded for equity since they are non-voting, but for the dividends they regularly earn. In reply thereto, I have the honor to inform you that Section 24(e)(2)(A) of the Tax Code, as amended and as implemented by Revenue Regulations No. 2-82 subjecting the net capital gains realized during each taxable year from the sale or exchange or other disposition of shares of stock not traded through a local stock exchange is not applicable to your sale of your Series "E" and "F" Preferred Shares considering that the said shares are "original issue" or first issued. cdtech Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner