Tax Consequence of Shares With a Book value of P38,836,337.00 Will be Declared as Property Dividend

November 22, 1988 BIR RULING NO. 554-88 21 (c) (2) 000-00 554-88 Gentlemen : This refers to your letter dated November 4, 1988 stating that your client, Pan Malayan Management and Investment Corporation (PMMIC) is a domestic corporation with an authorized capital stock of P100,200,000.00 divided into 2,000,000 Founders shares, 20,000 Preferred shares and 8,000,000 common non-voting shares, all with par value of P10.00 per share of which the following are issued and outstanding as of June 30, 1988: 787,320 Founders shares, 20,000 Preferred shares and 3,936,503 Common non-voting shares; that its unappropriated retained earnings as of June 30, 1988 is P266,534,243.00; that the following are the stockholders of PMMIC as of the said date: cdtech NAME CITIZENSHIP NUMBER OF SHARES HELD % OF FOUNDERS COMMON TOTAL OWNERSHIP Alfonso S. Yuchengco, Jr. Filipino 23,328 551,122 574,450 12.16% Alberto S. Yuchengco Filipino 23,328 551,122 574,450 12.16% Alfonso S. Yuchengco III Filipino 46,656 551,122 597,778 12.66% Helen Y. Dee Filipino 23,328 393,797 417,125 8.83% Susanne Y. Santos Filipino 23,328 393,797 417,125 8.83% Annabelle Y. Puey Filipino 23,328 393,750 417,078 8.83% Mona Lisa Y. Abaya Filipino 23,328 393,750 417.078 8.83% Yvonne S. Yuchengco Filipino 23,328 393,750 417,078 8.83% Michelle Y. Dee Filipino 23,328 23,328 0.49% Alfonso T. Yuchengco Filipino 554,040 314,293 868,333 18.38% TOTAL 787,320 6,936,503 4,723,823 100.00% that Mico Equities, Inc. is also a domestic corporation with an authorized capital stock of P100,000,000.00 divided into 1,000,000 common shares with a par value of P100.00 each share of which 635,000 shares are issued and outstanding as of December 31, 1987; that the book value per share of Mico Equities, Inc. as of December 31, 1987 is P425.00; that the following are the present stockholders of record owning more than three percent (3%) of the total outstanding capital stock of Mico Equities, Inc.: NAME NO. OF % OF SHARES HELD OWNERSHIP Pan Malayan Management & Investment Corporation 385,586 60.72% Micoba Holdings Limited 97,767 15.39% Munich Reinsurance Company 64,880 10.22% Great Pacific Life Assurance Corporation 21,170 3.33% Alfonso Yuchengco 26,170 4.12% that the 91,353 Mico Equities, Inc. shares proposed to be declared as property dividend by PMMIC in favor of the latter's stockholders are part of the shares originally held by PMMIC in Malayan Insurance Co., Inc.; that the said shares held by PMMIC in Malayan Insurance Co., Inc. were transferred by PMMIC to Mico Equities, Inc. solely in exchange for the latter's share of stock without recognition of gain or loss amended by Republic Act No. 4522 in a ruling by then Commissioner of Internal Revenue, Misael P. Vera dated May 23, 1972; that the historical acquisition cost to PMMIC of the said 91,353 Mico Equities shares is P4,804,560.00; that based on the book value of P425.00 per share, the total value of the 91,353 Mico Equities shares proposed to be declared by PMMIC as property dividend will amount to P38,836,337.00; and that the third party who is interested in buying the said shares to be declared as property dividend from the individual stockholders of PMMIC entitled thereto is offering to buy the same at P399.38 per share or for a total of P36,484,561.00. In connection therewith, you now request a ruling on the tax consequence to PMMIC and to its stockholders if the 91,353 Mico Equities shares with a book value of P38,836,337.00 will be declared as property dividend by PMMIC to its stockholders of record, and in the event the said shares will be subsequently sold by PMMIC's individual stockholders entitled thereto at P399.38 per share or for a total of P36,484,561.00 to the third party interested to buy the same. In reply thereto, I have the honor to inform you that dividends comprise any distribution whether in cash or other property in the ordinary course of business, even though extraordinary in amount, made by a domestic or resident corporation to the stockholders out of its earnings or profits. Moreover, dividends paid in securities or other property (other than its own stock) in which the earnings of a corporation have been invested, are income to the recipients to the amount of the full market value of such property when receivable by individual stockholders. A dividend paid in stock of another corporation is not a stock dividend, even though the stock distributed was acquired through the transfer by the corporation declaring the dividends of property to the corporation declares a dividend payable in a stock of another corporation, setting aside the stock to be so distributed and notifying the stockholders of its action, the income arising to the recipients of such stock is its market value at the time the dividend becomes payable. (Sections 250 and 251 Income Tax Regulations) Accordingly, the stockholders of PMMIC who will receive the 91,353 Mico Equities, Inc. shares as property dividends shall be subject to a final tax of 5% on the market value of the said shares pursuant to Section 21(c)(2) of the Tax Code, as amended. Moreover, the stockholders of PMMIC who will subsequently sell the aforementioned shares at P399.38 per share or for a total of P36,484,561.00 to a third party interested to buy the same shall not be subject to the capital gains tax prescribed under Section 21(d) of the Tax Code, as amended since no gain will be realized by the stockholders-sellers on the proposed sale. cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner