BIR Ruling [DA-425-04]

August 6, 2004 BIR RULING [DA-425-04] Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty . Romeo H. Duran Tax Principal Gentlemen : This refers to your letter dated July 26, 2004 requesting for a clarification regarding BIR Ruling No. S-40-018-2004, dated July 21, 2004, which we issued in response to your request for confirmation of your opinion that the transfer of assets and liabilities of Pacific Plans, Inc . (PPI) to Lifetime Plans, Inc .( Lifetime ) qualify under Section 40(C)(2) of the 1997 Tax Code and therefore subject to tax under said provision and related tax laws and regulations. With regard to the said ruling, you are seeking clarification on the following: 1. Whether the taxable gain resulting from the excess of the liabilities over the original basis of the assets shall be subject to the 32% corporate income tax and shall be entitled to the deductible corporate costs and expenses under Section 34 of the 1997 Tax Code; and 2. That the basis of the shares of stock to be received by PPI from Lifetime shall be the same as the total basis of the assets transferred decreased by the liabilities assumed by Lifetime and increased by the gain already realized upon the transfer. In reply, please be informed as follows: 1. We confirm your opinion that the taxable gain resulting from the excess of the liabilities over the original basis of the assets shall be subject to 32% corporate income tax and shall be entitled to the deductible corporate costs and expenses as provided under Section 34 of the 1997 Tax Code. 2. Section 40(C)(5)(a) of the 1997 Tax Code provides, to wit: "The basis of the stock or securities received by the transferor upon the exchange specified in the above exception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1) the money received, and (2) the fair market value of the other property received, and increased by (a) the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized on the exchange :Provided, That the property received as 'boot' shall have as basis its fair market value: Provided, further, That if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or acquires from the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of this paragraph, be treated as money received by the transferor on the exchange: Provided, finally, That if the transferor receives several kinds of stock or securities, the Commissioner is hereby authorized to allocate the basis among the several classes of stocks or securities." (Emphasis supplied) Inasmuch as a gain of P2,906,526.51 had already been recognized upon the transfer of assets, the same shall be added to the difference between the assets transferred and the liabilities assumed. Accordingly, the substituted basis of the shares of stock received by PPI from Lifetime shall be as follows: HIaSDc Property Allocated Shares Substituted Basis Cash 2,887 P48,331,683.00 Short-term bank placements 20,424 341,925,936 Other Assets 976,689 0 ======== ============ TOTAL 1,000,000 P390,257,619.00 Accordingly, this ruling hereby amends BIR Ruling No. S-40-018-2004 dated July 21, 2004 with regard to the inclusion of the phrase " that the taxable gain resulting from the excess of the liabilities over the original basis of the assets shall be subject to 32% corporate income tax and shall be entitled to the deductible corporate costs and expenses as provided under Section 34 of the 1997 Tax Code " and that the total basis of the assets transferred shall be decreased by the liabilities assumed by Lifetime and increased by the gain already realized upon the transfer as above-shown. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon the 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 Assistant Commissioner Legal Service