February 23, 2005

BIR RULING [DA-065-05]

APIC DA-139-2004

Rural Bank of Rosales, Inc. (ROSBANK)

Rizal Street, Poblacion, Rosales, Pangasinan

Attention: Mr. Andres M. Cornejo

Chairman & CEO

Gentlemen :

This refers to your letter dated February 2, 2004 requesting for a ruling that the
transfer of real properties by the Spouses Condrado and Sergia Estrella in favor of
Rural Bank of Rosales, Inc. (ROSBANK) representing additional infusion of capital
in the nature of paid-in surplus is not subject to the capital gains tax imposed under
Section 24 of the Tax Code of 1997.

Documents submitted disclosed that ROSBANK is a domestic corporation

duly registered with the Securities and Exchange Commission; that on October, 31,
2002, Spouses Condrado and Sergia Estrella executed two (2) separate Deed of
Conveyance, whereby they transferred to ROSBANK two (2) parcels of land located
in Rosales, Pangasinan; that on the same date, Sergia Estrella executed a Deed of
Conveyance whereby she transferred to ROSBANK her paraphernal property also
located in Rosales, Pangasinan; unit the corresponding fair market value/appraised
value of the aforementioned properties are as follows:

Property Area & value per sq.m. Valuation

A) Paraphernal Property of Sergia Estrella

TCT No. 21172 4,871 sq.m. @ P3,000/sq.m. P14,613,000.00

B) Conjugal Property of Spouses Estrella

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TCT No. 37196 13,910 sq.m. @ P2,000/sq.m. 27,820,000.00

TCT No. 36556}

TCT No. 36557} 2,392 sq.m. @ P3,000/sq.m. 7,176,000.00

TCT No. 36558} ===========

P49,609,000.00

that the above-listed properties were transferred to ROSBANK as additional

consideration in the nature of paid-in surplus for the existing shares of stock issued to
Spouses Condrado and Sergia Estrella; that by virtue of said transfer of realties, the
book value of the shares of stock owned by Condrado and Sergia Estrella shall be
increased accordingly; and that since the transfer of the above properties represents
additional infusion of capital in the nature of paid-in surplus, no shares shall be issued
by ROSBANK to Condrado and Sergia Estrella. CHIScD

In reply, please be informed that under Section 24(D)(1) of the Tax Code of
1997, a final tax of six percent (6%) based on the gross selling price or current fair
market value as determined in accordance with Section 6(E) of the same Code,
whichever is higher, is imposed upon capital gains presumed to have been realized
from the sale, exchange, or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de retro sales and other forms
of conditional sales, by individuals, including estates and trusts. The 6% final tax is
still imposed despite the fact that a transfer of property is made for a legitimate
business purpose and without monetary consideration. 1 This is so because the
foregoing tax is based on the capital gains presumed to have been realized by the
taxpayer on the said transfer transaction. Such being the case, the transfer of the
above-listed real properties to ROSBANK by stockholders Condrado and Sergia
Estrella, as contribution to its capital, is subject to the 6% capital gains tax herein
imposed.

On the other hand, Section 56 of Revenue Regulations No. 2, otherwise known

as the "Income Tax Regulations" reads

"Sec. 56. Contributions by shareholders. Where a corporation

requires additional funds for conducting its business and obtains such needed
money through voluntary process payments by its shareholders, the amounts
so received being credited to its surplus account or to a special capital
account, will not be considered income, although there is no increase in the
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 outstanding shares of stock of the corporation. The payments in such
circumstances are in the nature of voluntary assessments upon, and represent
an additional price paid for, in shares of stock held by the individual
shareholders, and will be treated as an addition to and as part of the operating
capital of the company."

Consequently, the fair market value of the above realties transferred, as so

appraised, being credited to the surplus account of ROSBANK (i.e., additional paid-in
capital) being a capital investment, is not within the purview of the term "taxable
income" as defined in Section 32 of the Tax Code of 1997. Accordingly, the transfer
of the above-listed real properties to ROSBANK by stockholders Condrado and
Sergia Estrella, as their contribution to its capital, should not be treated as income on
the part of the latter, thus, not subject to income tax. (BIR Ruling No. DA-221-02
dated November 25, 2002, cited in BIR Ruling Nos. DA-117-03 dated April 14, 2003
and DA-139-2004 dated March 26, 2004) CSaHDT

Finally, Section 185 of Revenue Regulations No. 26, otherwise known as the
"Documentary Stamp Tax Regulations" provides that

"Sec. 185. Conveyances without consideration. Conveyances of

realty not in connection with a sale, to trustees or other persons without
consideration are not taxable."

Considering that Condrado and Sergia Estrella transferred the above-listed real
properties without the corresponding issuance of additional shares of stock in their
favor, the foregoing will be considered as contribution of additional paid-in capital,
not subject to documentary stamp tax as the above conveyances of realties are without
any consideration and are not made in connection with a sale. (DA-139-2004 dated
March 26, 2004 citing DA-150-03 dated May 7, 2003)

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.

Very truly yours,

Commissioner of Internal Revenue

By:

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 (SGD.) JOSE MARIO C. BUAG
Deputy Commissioner
Legal and Inspection Group
Footnotes
1. Except those transactions specified as exempt under the Tax Code.

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