Selling Price of Secondary Sales of PCI Bank's Series "E" Preferred Shares for Capital Gains Tax

December 7, 1988 BIR RULING NO. 573-88 24 000-00 573-88 Gentlemen : This refers to your letter dated November 18, 1988 in behalf of your client, Philippine Commercial International Bank (PCI Bank) relative to BIR Ruling No. 24(e)(2)(A)-000-00-494-88 dated October 12, 1988 in answer to your client's letter dated September 22, 1988 where this Office held 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" that your aforesaid client's letter of September 22, 1988 referred not only to "original sales" or "first issuances" but also to the secondary sales of PCI Bank's Series "E" preferred shares. It is represented that the sales contemplated by your client were sales by PCI Capital Corporation which had earlier bought at par value from PCI Bank P150 Million worth of preferred shares; that PCI Capital Corporation had, in turn, sold these shares to investors at par value or just over par value, many of whom later re-sold such shares to PCI Bank's Gratuity Fund; that PCI Bank's Gratuity Fund has, in turn been selling said shares to investors many of whom again would sell back these shares to the Fund; that all these investors were not really interested in owning equity in PCI Bank but merely earning the regular dividends the shares earn during the time that they would hold the shares which during that time and up to now fetch a higher yield than the yield of money market placements; that the Series "E" preferred shares have no voting rights; that it is convertible to common stock only at a premium equal to three times the book value of PCI Bank's common stock; that while the par value of a Series "E" preferred shares is equal to the par value of a common stock (P100.00) per share, the conversion rate is lower such that it will take possibly three Series "E" preferred shares to convert to one (1) common stock; that Series "E" preferred shares are redeemable at anytime by PCI Bank at par value plus accrued and unpaid dividends within three years and at the end of the third year, PCI Bank is obligated to redeem said shares; that the fact that PCI Bank can at anytime redeem the Series "E" preferred shares at par value places a ceiling on the fair market value of the shares; that the accrued and unpaid dividends; that in fact no investors is willing to pay the book value unless the book value is equal to or lower than par value for Series "E" preferred shares considering that PCI Bank can redeem the shares at par value at anytime. In connection therewith you now request a ruling as to whether the selling price of secondary sales of PCI Bank's Series "E" preferred shares for capital gains tax purposes is the par value plus accrued and unpaid dividends, if any. In reply thereto, please be informed that under the foregoing facts, the selling price of the secondary sales of PCI Bank's Series "E" preferred shares for capital gains tax purposes shall be its par value plus accrued and unpaid dividends, if any, considering that the said Series "E" preferred shares may be redeemed by PCI Bank at anytime at par value thereof plus accrued and unpaid dividends if any, within three years and at the end of the third year from the date of issue thereof, PCI Bank is obligated to redeem said shares. aisadc Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner