Roberto L. Hinolan

August 1, 2008 BIR RULING [DA-(S40C-001) 098-08] 40 (C) (2) (6) (c); S40-028-2006 Roberto L. Hinolan Room 1, JTL Building North Drive, Bacolod City Gentlemen : This refers to your letter dated July 8, 2008 requesting for a ruling on behalf of your clients, Lina G. Ong, et al., that no gain or loss is recognized on the transfer of their properties to 426 Holdings, Inc. in exchange for the latter's shares of stock in accordance with Revenue Regulations No. 18-2001 and falling under Section 40 (C) (2) and (6) (c) of the Tax Code of 1997. ICAcHE Documents submitted show that 426 Holdings, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an original authorized capital stock of Twenty Five Million Pesos (P25,000,000.00) divided into Two Hundred Fifty Thousand (250,000.00) shares with a par value of One Hundred Pesos (P100.00) per share; that the incorporators of the corporation with their corresponding shares subscribed and paid-up are as follows: Name No. of Shares Amount of Shares Amount Paid Subscribed Subscribed Luis T. Ong 50,000 P5,000,000.00 P1,250,000.00 Lina T. Ong 3,125 312,500.00 312,500.00 Stephanie O. Chiu 3,125 312,500.00 312,500.00 Catherine G. Ong 3,125 312,500.00 312,500.00 David C. Chiu 3,125 312,500.00 312,500.00 TOTAL 62,500 P6,250,000.00 P2,500,000.00 ====== =========== =========== that Rosita C. Gochangco, Lina G. Ong, Lito B. Ong, Lady Chua Han, Violeta C. Yu, Ong On Log, Anita C. Wu and Antonio Gustilo (collectively the assignors) are the registered co-owners of a commercial land located at Reclamation Area, Bacolod City covered by Transfer Certificate of Title (TCT) No. T-178295 with Property Index No. 143-00-062-03-031 and whose present market value is P116,411,700.00; that the assignors executed a Deed of Assignment on June 30, 2008 in favor of 426 Holdings, Inc. whereby they will transfer to the latter the title and ownership over their property in exchange for and as payment of Seventy Thousand (70,000) shares with a par value of One Hundred Pesos (P100.00) per share worth Seven Million Pesos (P7,000,000.00); that portion of the subscription will be taken from the unissued shares of Eighteen Million Seven Hundred Fifty Thousand Pesos (P18,750,000.00); and that as a result of the transfer, the assignors will gain control of 426 Holdings, Inc. by owning 55.18% of the total voting stocks of the said corporation as follows: Name No. of Amount Amount % of Shares Subscribed Paid Ownership Luis T. Ong 50,000 P5,000,000.00 P1,250,000.00 37.74 Lina T. Ong 24,125 2,412,500.00 2,412,500.00 18.21 Stephanie O. Chiu 3,125 312,500.00 312,500.00 2.36 Catherine G. Ong 3,125 312,500.00 312,500.00 2.36 David C. Chiu 3,125 312,500.00 312,500.00 2.36 Rosita C. Gochangco 21,000 2,100,000.00 2,100,000.00 15.85 Lito B. Ong 7,000 700,000.00 700,000.00 5.28 Lady Chua Han 10,500 1,050,000.00 1,050,000.00 7.92 Violeta C. Yu 3,500 350,000.00 350,000.00 2.64 Ong On Log 3,500 350,000.00 350,000.00 2.64 Anita C. Wu 1,750 175,000.00 175,000.00 1.32 Antonio Gustilo 1,750 175,000.00 175,000.00 1.32 Total 132,500 13,250,000.00 9,500,000.00 100% ======= ========== ========= ===== In support of your request, you submitted to this Office the following documents: 1) Duly notarized Application and Joint Certification (BIR Form 1927); 2) Proof of payment of the processing and certification fee; 3) Original Copy of the Deed of Conveyance; 4) Certified true copy of the Articles of Incorporation of 426 Holdings, Inc.; 5) Photocopy of the TCT; 6) Photocopy of the Tax Declaration; 7) Sworn Certification of Cost of the property transferred; 8) Photocopy of the zonal value of the real property transferred; and 9) other pertinent documents. In reply thereto, please be informed that pursuant to Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, no gain or loss shall be recognized if property is transferred to a corporation by a person, in exchange for stock in such a corporation of which as a result of such exchange, said person, alone or together with others, not exceeding four persons, gain control of said corporation. The term "control" shall mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stocks received i.e. , total subscribed by the transferor. In determining the 51% stock ownership, only those persons who transferred property for stocks in the same transaction may be counted up to a maximum of five. Considering that only five (5) transferors are allowed to transfer property to the corporation and gain control of the same, any transfer of property made by persons in excess of the aforesaid limit shall be subject to the capital gains tax imposed under Section 24 (D) (1) of the 1997 Tax Code. Accordingly, no gain or loss shall be recognized on the transfer by Rosita C. Gochangco, Lina G. Ong, Lito B. Ong, Lady Chua Han and Violeta C. Yu, Ong On Log, Anita C. Wu and Antonio Gustillo of their properties in exchange for shares of stock of the transferee corporation, 426 Holdings, Inc. considering that as a consequence of the exchange, they gained control of the transferee corporation by owning 55.18% of its total voting stocks. cHDEaC However, insofar as Ong On Log, Anita C. Wu and Antonio Gustilo are concerned, who likewise transferred their portion over their properties in favor of 426 Holdings, Inc. in exchange for the latter's shares of stock, the transfer thereof shall be subject to capital gains tax under Section 24 (D) (1) of the Tax Code of 1997. It should be emphasized, however, 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 or stocks is considered. Thus, if the Assignors later sell or exchange the shares of stock they acquired in the exchange, they shall be subject to income tax on the gains they 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 the transferors of the property exchanged therefor; 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. [Sec. 40 (C) (5) (a) and (b) of the Tax Code of 1997] cCAIES Applying the foregoing in the instant case, the basis of the stocks received by the transferor upon the exchange shall be the same as the basis of the property they had transferred to 426 Holdings, Inc., hence, the substituted basis for the shares of stock received by the assignors in exchange of their property, is as follows: Name of Portionate No. of Shares Substituted Basis Assignor Interest in the Land Allocated (in Pesos) Rosita C. Gochangco 30% 21,000 2,826,180.00 Lina G. Ong 30% 21,000 2,826,180.00 Lito B. Ong 10% 7,000 942,060.00 Lady Chua Han 15% 10,500 1,413,090.00 Violeta C. Yu 5% 3,500 471,070.00 Ong On Log 5% 3,500 471,070.00 Anita C. Wu 2.5% 1,750 235,515.00 Antonio Gustilo 2.5% 1,750 235,515.00 Total 100% 70,000 9,420,600.00 ===== ===== ========== On the other hand, the basis of 426 Holdings, Inc. on the property it received upon the exchange shall be the original acquisition cost or adjusted cost basis of the assignors of the property: Type of Property TCT No. Tax Declaration No. Historical Cost Commercial Land T-178295 143-00062-03031 P9,420,600.00 Moreover, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gains provided for in Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, they should comply with the requirements hereunder mentioned: A. The transferor must file with their income tax return for the taxable year in which the exchange transaction was consummated, a complete statement of all facts pertinent to the exchange, including: 1. A description of the property they transferred, or of their interest in such property, with a statement of the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer; 2. The kinds of stocks received and preferences, if any; 3. The number of shares of each class received; and 4. The fair market value per share of each class at the date of the exchange. cICHTD B. On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the following: 1. A complete description of the property received from the transferor; 2. A statement of the original acquisition cost or other basis of the property in the hands of the transferor and the adjusted cost basis thereof at the time of the transfer; and 3. Information with respect to the capital stock of the corporation including: a. The total issued and outstanding capital stock immediately prior to and immediately after the exchange with a complete description of each class of stock; b. The classes of stocks and number of shares issued to the transferor in the exchange; and c. The fair market value as of the date of the exchange of the capital stock issued to the transferor. In addition to the foregoing requirements, the parties shall enclose with their respective income tax returns for the taxable year in which the tax-free exchange occurred a copy of the request for ruling filed with, and the corresponding ruling issued by the Bureau of Internal Revenue, both duly stamped received by the appropriate office of the Bureau of Internal Revenue. Such persons shall include as a note to their respective audited financial statements for the taxable year in which the exchange occurred a statement to the effect that they hold such assets/shares acquired in a tax-free exchange and the year in which such exchange occurred, and in the taxable years until the subject property are subsequently transferred to another transferee. The parties shall, pursuant to Section 58 (E) of the Tax Code of 1997, also cause the Register of Deeds to annotate on the Transfer Certificate of Title and/or the Corporate Secretary to annotate at the back of the Certificates of Stock, the date the deed of conveyance was executed, the original or historical cost of acquisition of the property or shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange; provided however, that any violation by the Register of Deeds of this condition shall be penalized under Section 269 of the same Code. It is further required that within ninety (90) days from receipt of this ruling, the parties to the transaction must submit to the Law Division, Bureau of Internal Revenue, a certified true copy by the Register of Deeds or Corporate Secretary, as the case may be, of duly annotated TCT/Certificates of Stock, in respect of the transferred property and shares of stock of transferee corporation. ICTDEa The fair market value and the zonal valuation as stated above shall be subject to verification by the RDO concerned. Pursuant to Section 196 of the Tax Code of 1997, a conveyance or deed whereby land is assigned or transferred to another person 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. However, under Republic Act (R.A.) No. 9243 which took effect on March 20, 2004, transfer of property pursuant to Section 40 (C) (2) of the 1997 Tax Code, as amended, is now exempt from the payment of documentary stamp tax (DST) under Section 196 of the Tax Code of 1997. Accordingly, the transfer by the assignors of their real property to 426 Holdings, Inc. as in this case, is not subject to DST under said section. However, the shares to be issued by 426 Holdings, Inc. are original issues subject to the documentary stamp tax imposed by Section 175 (now Section 174) of the Tax Code of 1997, as amended, which shall attach upon acceptance by the corporation of the stockholder's subscription regardless of the actual delivery of the certificates of stock. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service