BIR Ruling [DA-085-02]

May 02, 2002 BIR RULING [DA-085-02] S40 (C) (2); 031-2001; 5/8/01 Carag, Caballes, Jamora & Somera Law Offices 2nd Floor, The Plaza Royale, 120 L.P. Leviste Street Salcedo Village, Makati City Attention: Atty. Carlo A. Carag Gentlemen : This refers to your letter dated April 18, 2002 requesting, on behalf of your client, PHILIPPINE RACING CLUB, INC. (PRCI for brevity) for confirmation of your position on and interpretation of certain tax implications of your client's investment in a wholly owned subsidiary and its planned sale of such investment in the future. The facts, as you represented, are as follows: PRCI is a domestic corporation, which was granted by the Philippine government the right and authority to operate a racetrack in Makati City or in the provinces of Cavite, Rizal and Laguna under R.A. No. 7953. This authority is for a term of 25 years from October 1997. At present, PRCI operates the Santa Ana racetrack located in Carmona, Makati City. In addition, PRCI shares are listed and traded in the Philippine Stock Exchange. In 2001, PRCI formed a wholly owned subsidiary, Sta. Ana Park Square Holdings, Inc. (SAPSHI for brevity). SAPSHI shall own and develop a portion of the 2.8-hectare Santa Ana Park property in Makati City currently owned by PRCI. SAPSHI is organized and existing under the Philippine laws, with an authorized capital stock of One Million Pesos (P1,000,000) divided into One Million (1,000,000) shares with a par value of One Peso (P1.00) per share. At present, the stockholders of SAPSHI are as follows: Name No. of Amt. of Capital Amount Percentage Shares Stock Paid-In Of Subscribed Subscribed Ownership PRCI 24,995 P249,995.00 P62,495.00 99.9980% Santiago Cua 1 1.00 1.00 .0004% Exequiel D. Robles 1 1.00 1.00 .0004% Solomon S. Cua 1 1.00 1.00 .0004% Ramon Erenta, Jr. 1 1.00 1.00 .0004% Allan V. Abesamis 1 1.00 1.00 .0004% TOTAL P25,000 P250,000.00 P62,500.00 100.00% ========= ========= ========= ======== PRCI intends to subscribe to an additional Seven Hundred Fifty Thousand (750,000) shares of stock of SAPSHI with an aggregate par value of Seven Hundred Fifty Thousand pesos (750,000.00) for a full subscription of the authorized capital of SAPSHI. In full payment thereof, PRCI shall transfer to SAPSHI parcels of land with a total area of four hectares as described below: Property TCT No. Location Area Zonal Historical (sq.m.) Value Cost Land 356178 Makati City 6,228 P37,368,000.00 P9,758.00 Land 102446 Makati City 33,772 202,632,000.00 52,917.00 Total 40,000 P240,000,000.00 P62,675.00 ====== ============ ======== The parcel of land covered by TCT No. 356178 has a total area of Seven Thousand Four Hundred Eight square meters (7,408 sq.m.). Out of the said total area, only a portion thereof with an area of Six Thousand Two Hundred Twenty Eight square meters (6,228 sq.m.) will be segregated and transferred to SAPSHI. Also, the parcel of land covered by TCT No. 102446 has a total area of Two Hundred Twenty Four Thousand One Hundred Eighty Six square meters (224,186 sq.m.). Out of the said total area, only a portion thereof with an area of Thirty Three Thousand Seven Hundred Seventy Two square meters (33,772 sq.m.) will be segregated and transferred to SAPSHI. Pending approval of the subdivision plan for the parcels of land covered by TCT Nos. 356178 and 102446, PRCI agrees to transfer ownership interest over the subject portions of said properties to SAPSHI. Upon the issuance of the titles covering the said segregated portions in the name of PRCI, PRCI will execute the necessary deed of conveyance in favor of SAPSHI in order to transfer the said titles to SAPSHI. As a result of the exchange, PRCI shall gain further control of SAPSHI by owning Ninety Nine and 9,995/10,000 percent (99.9995%) of the voting stock of SAPSHI distributed as follows: Name No. of Amt. of Capital Amount Percentage Shares Stock Paid-In Of Subscribed Subscribed Ownership PRCI 995,995 P999,995.00 P999,995.00 99.9995% Santiago Cua 1 1.00 1.00 .0001% Exequiel D. Robles 1 1.00 1.00 .0001% Solomon S. Cua 1 1.00 1.00 .0001% Ramon Erenta, Jr. 1 1.00 1.00 .0001% Allan V. Abesamis 1 1.00 1.00 .0001% TOTAL 1,000,000 P1,000,000.00 P1,000,000.00 100.00% ========= ========= ========= ======== In support of your request, you submitted the following documents: 1) Copy of TCT Nos. 356178 and 102446, 2) Copy of the Articles of Incorporation of and Corporate By-Laws of PRCI, and 3) Copy of the Articles of Incorporation of and Corporate By-Laws of SAPSHI. In reply, please be informed of the following: I. On the Tax Free Exchange of Property Pursuant to the last paragraph of Sec. 40(C)(2) of the 1997 Tax Code, no gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation. The term "control" shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. Accordingly, no gain or loss shall be recognized both on the PRCI and SAPSHI on the transfer by PRCI of its properties in exchange for the shares of stock of SAPSHI considering that as a consequence of the exchange PRCI shall gain further control of SAPSHI by owning 99.9995% of its total voting stocks. II. On the Documentary Stamps Tax Pursuant to Section 196 of the Tax Code of 1997, a conveyance or deed whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of the same Code, whichever is higher. Accordingly, the exchange of real properties by PRCI with shares of stock of SAPSHI shall be subject to the documentary stamp tax on the Deed of Assignment executed to effect the aforesaid transfer based on the consideration or the fair market value of the property, whichever is higher. After payment of the corresponding documentary stamp tax, the real property may be registered by the Register of Deeds concerned in the name of SAPSHI. The shares to be issued by SAPSHI are original issues subject to the documentary stamp tax imposed by Section 175 of the Tax Code of 1997, which shall attach upon acceptance by the corporation of the stockholder's subscription regardless of the actual delivery of the certificates of stock. III. On the Tax upon the Subsequent Disposition of Property by SAPSHI It should be emphasized that Section 40(C)(2) and (6)(c) of the Tax Code of 1997 merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the property or of the stocks involved in the exchange, the original or historical cost of the property is considered. The cost basis to SAPSHI of the real properties that will be exchanged for stocks shall be the same as it would be in the hands of PRCI increased by the amount of the gain recognized to PRCI on the transfer. [ Sec. 40(C)(5)(b) of the Tax Code of 1997 ]. IV. On the Capital Gains from the Subsequent Sale of Shares of Stock If PRCI later sell or exchange the shares of stock it acquired in the exchange, it shall be subject to income tax on the gains it derived from such sale or exchange, taking into consideration that the cost basis of the shares shall be the same as the original acquisition cost or adjusted cost basis to PRCI of the property that will be exchanged therefor. [ Sec. 40(C)(5)(a) and (b) of the Tax Code of 1997 ]. Moreover, the net capital gains realized from the subsequent sale of such shares of stock shall be subject to a final tax on the net capital gains at the rates prescribed under Section 27(D)(2) of the Tax Code of 1997. It should be noted, however, that for the above transactions to be considered as a tax free transfer under Section 40(C)(2) and Section 40(C)(6)(b) of the Tax Code of 1997, the requirements under RR 18-2001 and Revenue Memorandum Order No. 32-2001 dated November 28, 2001 must be strictly complied with. 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: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service