BIR Ruling [DA-204-02]

November 13, 2002 BIR RULING [DA-204-02] 40 (C) (2) & (6) (c) Carandang & Carandang Law Partnership S-1B Sunvar Plaza 156 Amorsolo Street, Legaspi Village Makati City 1200 Attention: Atty. Dante A. Carandang Gentlemen : This refers to your letter dated May 27, 2002 requesting for an amendatory ruling to BIR Ruling No. S40-012-2001 dated February 28, 2001 in order to correct the errors inadvertently committed and give effect to the real intention of the parties: It is represented that on April 7, 2000, the Carandang Group (composed of MG Carandang Development Corporation, Genesis Farms Corporation, Spouses Dante and Ellen Grace Carandang, Rey A. Carandang and Benjamin A. Carandang) and First Asia Venture Capital, Inc. (FAVCI) entered into a Memorandum of Agreement (MOA) wherein they agreed to establish an academic institution, later named First Asia Institute of Technology and Humanities, Inc. (FAITH). Under the MOA dated April 7, 2000, FAVCI shall infuse Fifty Million Pesos (P50,000,000.00) in cash and shall be issued Five Hundred Thousand (500,000) FAITH shares of stock. On its part, the Carandang Group shall contribute the following properties in exchange for Five Hundred Thousand (500,000) FAITH shares of stock: TCT No. Area to be assigned to FAITH (Sq.m.) No. 22513 967 No. 30385 5,674 No. 61627 5,674 No. 30386 3,437 No. 30387 3,437 No. 30325 3,436 No. 30326 (Portion) 2,296 Total 24,921 In July 2000, the Carandang Group and FAVCI also entered into another agreement, entitled "Addendum to the Memorandum of Agreement dated 07 April 2000" (Addendum), wherein the MG Carandang Development Corporation (MGCDC) agreed to sell to FAITH another portion of the lot covered by TCT No. 30326 to the extent of 1,539 square meters in consideration of Six Million Nine Hundred Six Thousand Pesos (P6,906,000.00). On October 5, 2000, the Carandang Group, through its consultant, Tax Counselling Integrated, wrote the Bureau of Internal Revenue (BIR), seeking a ruling on the tax consequence, if any, of the aforementioned exchange of properties for FAITH shares. Attached with the request for the tax ruling, among others, is the Deed of Assignment of the lot covered by TCT No. 30326 which failed to state that only a portion thereof with an area of 2,296 square meters (not the total 6,962 square meters) was being transferred to FAITH by virtue of the tax-free exchange. On February 28, 2001, the BIR, acting on the request submitted by the Tax Counselling Integrated, issued BIR Ruling No. S40-012-2001 and declared the tax-exempt status of the aforesaid transaction. However, the real and genuine intention of MGCDC and FAVCI under the MOA was to transfer only a portion, specifically 2,296 square meters , of the lot covered by TCT No. 30326 to FAITH by virtue of the tax-free exchange and under the Addendum , another portion thereof, specifically 1,539 square meters , through a straight sale transaction. In a capsule, the lot covered by TCT No. 30326 containing a total area of 6,692 square meters, shall be reduced by (a) 2,296 square meters (per MOA) and (b) 1,539 square meters (per Addendum). In the above-captioned ruling, there was no qualification as to the area covered by the tax-free exchange in so far as TCT No. 30326 is concerned. There was no mention of the words "a portion of TCT No. 30326." It may, therefore, be interpreted that the said ruling covers the entire area of the lot under TCT No. 30326. During the implementation of the transaction, MGCDC actually transferred to FAITH from TCT No. 30326 a total of 3,436 square meters, broken down as follows: a) 1,897 square meters instead of 2,296 square meters as provided under the MOA; and b) 1,539 square meters per Addendum, or a total of 3,835 square meters as illustrated by the following table: Lot area of TCT-30326 to be assigned by MGCDC to FAITH Per MOA/Addendum As implemented Difference 2,296 1,897 399 1,539 1,539 3,835 3,436 399 Furthermore, under the tax-free exchange, the lot under TCT No. 30387 registered in the name of Dante Carandang, with an area of 3,437 square meters, shall be transferred in exchange for 67,315 FAITH shares. However, the BIR ruling authorized the issuance of a total of 78,239 FAITH shares to spouses Dante and Ellen Grace Carandang, broken down into 39,120 and 39,119 shares, respectively. Under the Memorandum of Agreement (MOA) and the Share Purchase Agreement, (SPA), only 67,315 FAITH shares shall be issued to said spouses (33,658 for Dante and 33,657 for Ellen Grace) in exchange for said lot under TCT No. 30387. Also, on page 2 of the BIR Ruling, the Appraisal Value of the Properties covered by the tax-free exchange did not reflect the value of the properties as appraised by Cuervo Appraisers, Inc. although in the application for the said ruling, a copy of a document entitled "Fair Market Value Appraisal" dated September 30, 1999 by Cuervo Appraisers, Inc. was submitted. In the light of the foregoing facts and circumstances, BIR Ruling S40-012-2001 is amended to reflect the following: 1. Only 2,296 square meters of the lot covered by TCT No. 30326 are to be assigned by MGCDC to FAITH and the remaining area excluded from tax-free exchange; 2. The FAITH shares of stocks issued to spouses Dante and Ellen Grace Carandang in exchange for the lot under TCT No. 30387, shall be distributed, as follows: 33,658 (Dante) and 33,657 (Ellen Grace); and 3. The Fair Market Appraisal Value by Cuervo Appraisers, Inc., as contained in the appraisal report dated 1 September 1999, should reflect the following: Name TCT No. Appraisal Value of Cuervo Appraisers, Inc. MGCarandang Development (Portion of) Corporation 30326 6,526,000.00 22513 Genesis Farms Corp. 30325 7,559,200.00 Benjamin A. Carandang 30385 12,482,800.00 Rey A. Carandang 30386 10,311,000.00 Dante A. Carandang Married 30387 10,311,000.00 to Ellen Grace Carandang Since the transfer by M.G. Carandang Development Corporation, Genesis Farm Corporation, Benjamin A. Carandang, Rey A. Carandang, Dante Carandang of their properties in exchange for shares of stock of the transferee corporation, First Asia Institute of Technology and Humanities, Inc., after the exchange of properties and as a result of such exchange, not more than five (5) of the transferors namely, M.G. Carandang Development Corporation, Genesis Farm Corporation, Benjamin A. Carandang, Rey A. Carandang, and Dante Carandang would still gain control of the transferee corporation by owning 57.84% of its total voting stocks. Hence, no gain or loss shall be recognized by the transferors and the transferee corporation on such exchange. However, it should be emphasized that Section 40(C)(2) and (6)(c) of the Tax Code of 1997 merely defer recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if the transferors later sell or exchange the shares acquired by them in the exchange, they shall be subject to income tax on gains derived from the 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 the transferors of the property exchanged therefore, and that the cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferors. You are further advised that the other conditions stated in BIR Ruling S40-012-2001 shall remain in effect and should be complied with by the transferors and the transferee corporation. In addition, MGCDC and FAITH shall execute a Deed confirming the sale of the 1,539 square meters and pay the corresponding taxes to the BIR reckoned from the date of execution of the said Deed. 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, and/or any of the requirements imposed in this letter is not complied with, then this ruling shall be considered null and void. This ruling amends BIR Ruling No. S40-012-2001 dated February 28, 2001. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group