Securities Becoming Worthless
The following are the rules to be observed on securities becoming worthless for
purposes of income taxation:
1. The securities are ascertained worthless and written off;
2. The taxpayer owning the securities being written off should not be a bank or a
trust company incorporated under Philippine laws; and
3. The written off amount is a capital loss.
Illustration
Adalyn Company, a domestic corporation engaged in producing chocolates, invested 10,000
ordinary shares amounting to P200,000 in Philippine Airlines.
Due to bankruptcy, Philippine Airlines closed its operations, such that the investment of Adalyn
was ascertained worthless and should be written off. The entire amount of investment
(P200,000) should be considered capital loss on shares becoming worthless.
Liquidating Dividends
When a corporation distributes all of its assets in full dissolution, the gain realized or
loss incurred by its stockholder, whether individual or corporate, is taxable or deductible
from capital gain as the case may be.
Illustration
Mr. CondradMapalo invested in Benguet Corporation by buying 5,000 shares at P50 per share.
If Mr. Mapalo received a total amount of P300,000 from Benguet Corporation upon its complete
liquidation, then the determination of taxable gain would be:
Total amount received P300, 000
Less: Cost of shares surrendered (P50 x 5,000 shares) 250, 000
Taxable gain P50, 000
If Mr. Mapalo received a total amount of P240, 000 from Benguet Corporation upon its
complete liquidation, then the determination of deductible loss would be:
Total amount received P240, 000
Less: Cost shares surrendered (5, 000 x P50) 250, 000
Deductible loss P10, 000
Corporation’s Own Shares of Stock
Corporation’s own shares of stock refer to the shares of stock to be issued by the
corporation as approved in its Articles of Incorporation. Corporate stocks are classified
into Preferred Stock and Common Stock.
Preferred stock is a class of the stock of a corporation, which is accorded priority by the
charter or by-laws with respect to dividends and/or assets in case of liquidation over the
remainder of the stocks of the corporation which are called common stocks.
Common stock represents basic interest of ownership in a corporation. Stockholders
holding common shares are called common stockholders. They assume greater risk but
generally exercise a greater control and may receive a greater reward in the form of
dividends and capital appreciation.
Note: When a corporation issued only one class of stock, the stock is automatically a common stock.
Tax Treatment. As a rule, the original issue by a corporation of its shares of stock at
more or less than the par value or stated value shall have no recognition of gain or loss.
Hence, it is not subject to capital gains tax.
However, the gain or loss incurred from dealings by a corporation in its own capital
stock transactions may give rise to either taxable gain or taxable loss based on
transactions involving:
a. Receipt of own share in exchange for property (acquisition of treasury stock); or
b. Sale of treasury stock.
Own Share Received in Exchange for Property
When a corporation received its own stock as consideration for property sold or for
payment of indebtedness, it may give rise to a gain or loss to be computed as though
payment has been made in any other property.
Additional assessments obtained by a corporation from its shareholders represent
additional price and they are not considered income.
Illustration
Assume that Triple A Company received 2, 000 shares of its common stock with a par value of
P50 per share in exchange for a computer with a cost of P100,000. The fair market value of the
common stock at the time of exchange was P60 per share.
The computation of the taxable gain on the transaction would be:
Fair market value of common stock (P60 x 2, 000) P120, 000
Less: Cost of property given 100, 000
Taxable capital gain P20, 000
Sale of Treasury Stock
Treasury stockis a corporation’s own stock that has been issued and then reacquired
but not cancelled. The sale of the corporation of its treasury stock may give rise to a
taxable gain if the treasury stock it’s subsequently reissued for a consideration more
than its cost. A deductible loss may be incurred if the treasury stock it’s subsequently
reissued for a consideration less than its cost.
Illustration
Assume that Triple A Company reacquired 100 shares of its common stock with a par value of
P100 per share for P15, 000. Fifty shares were subsequently reissued at P180 per share.
Assuming that the shares were traded outside the stock exchange, the taxable gain on the
reassurance of treasury stock is computed as follows:
Consideration received (P180 x 50) P9, 000
Less: Cost of treasury stock (P15, 000 x 50/100) 7, 500
Taxable capital gain P1,500
Sale of Corporate Bonds
The issuance of a corporation of its bonds at face value does not give rise to gain or
loss. The gain or loss is recognized when the corporation issues its own bonds at a
premium or a discount.
The recognition of gain or loss, however, shall be based on the amortized premium or
discount over the life of the bonds.
Retirement of Bonds
The bonds may be retired before its maturity date. The gain or loss on bond retirement
shall be taxable gain or deductible loss.
Based on the illustration above, supposed that A Corporations bonds were retired two
years later at 105%. The gain or loss on retirement would be:
Face value of bonds P1, 000, 000
Redemption price (1, 000, 000 x 105%) (1, 050, 000)
Loss on retirement of bonds P 50, 000
Unamortized premium (P20, 000 x 3 years) 60, 000
Net gain on retirement of bonds P 10, 000
Interest in Partnership
The gain or loss on sale of partner’s interest (capital) in the partnership is a capital
asset transaction.
Illustration
Mr. LabinTador’s capital in the partnership has a book value of P100, 000. He sold 50% of his
interest to Mr. Wato See for P80, 000.
Tador’s capital gain would be P30, 000, computed as follows:
Proceeds from sale of interest P 80, 000
Less: Book value of interest sold (P100, 000 x 50%) 50, 000
Capital gain P 30, 000
