V.Y. Eleazar & Associates

December 16, 2008 BIR RULING [DA-(S40M-022) 541-08] 40 (C) (2) (6) (c); S-40- V.Y. Eleazar & Associates 10/F Marvin Plaza Building 2153 Chino Roces Avenue Makati City Attention: Atty. Victor Y. Eleazar and Atty. Romulus V. Tatel Gentlemen : This refers to your letter dated November 5, 2008 requesting a ruling that no gain or loss is recognized on the transfer of a parcel of land by LUISA P. RAMIREZ, CLAUDIO P. RAMIREZ III, CARLOS P. RAMIREZ, CESAR P. RAMIREZ, CONRADO P. RAMIREZ, CAMILO P. RAMIREZ and CLARO P. RAMIREZ in favor of C. RAMIREZ & CO., INC. in exchange for its shares of stock in accordance with Revenue Regulations No. 18-2001 and falling under subparagraphs (C) (2) and (6) (c), Section 40 of the Tax Code of 1997, as amended. Documents submitted disclosed that C. RAMIREZ & CO., INC. is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of Twenty Million Pesos (P20,000,000.00) divided into Two Hundred Thousand (200,000) shares with a par value of One Hundred Pesos (P100.00) per share; that the stockholders of record with their corresponding shares subscribed are as follows: Stockholders No. of Shares Amount Subscribed Amount Paid-up LUISA P. RAMIREZ 39,284 P3,928,400.00 P2,053,400.00 CLAUDIO P. RAMIREZ III 4,911 491,100.00 256,725.00 CARLOS P. RAMIREZ 4,911 491,100.00 256,725.00 CESAR P. RAMIREZ 4,911 491,100.00 256,725.00 CONRADO P. RAMIREZ 4,911 491,100.00 256,725.00 CAMILO P. RAMIREZ 4,911 491,100.00 256,725.00 CLARO P. RAMIREZ 4,911 491,100.00 256,725.00 TOTAL 68,750 P6,875,000.00 P3,593,750.00 ====== =========== ========== that LUISA P. RAMIREZ, CLAUDIO P. RAMIREZ III, CARLOS P. RAMIREZ, CESAR P. RAMIREZ, CONRADO P. RAMIREZ, CAMILO P. RAMIREZ and CLARO P. RAMIREZ are co-owners of a parcel of land, the fair market value and historical/acquisition cost of which are as follows: CAaSHI Property Fair Market Value Historical/Original Acquisition Cost Parcel of land covered by TCT # P13,565,250.00 P2,713,050.00 RT-73610(340029) PR-20327 that a proposed Deed of Assignment will be executed by and among LUISA P. RAMIREZ, CLAUDIO P. RAMIREZ III, CARLOS P. RAMIREZ, CESAR P. RAMIREZ, CONRADO P. RAMIREZ, CAMILO P. RAMIREZ and CLARO P. RAMIREZ in favor of C. RAMIREZ & CO., INC., whereby the former will transfer to the latter the title and ownership over their above-mentioned properties in exchange for and as payment for their subscriptions; and that as a result of the above transfer, LUISA P. RAMIREZ, CLAUDIO P. RAMIREZ III, CARLOS P. RAMIREZ, CESAR P. RAMIREZ, CONRADO P. RAMIREZ, CAMILO P. RAMIREZ and CLARO P. RAMIREZ will gain control of C. RAMIREZ & CO., INC. by owning 100% of the total voting stocks of the said corporation as follows: Name No. of Shares Amount % of Ownership LUISA P. RAMIREZ 56,484 P5,648,400.00 57.141% CLAUDIO P. RAMIREZ III 7,061 706,100.00 7.143% CARLOS P. RAMIREZ 7,061 706,100.00 7.143% CESAR P. RAMIREZ 7,061 706,100.00 7.143% CONRADO P. RAMIREZ 7,061 706,100.00 7.143% CAMILO P. RAMIREZ 7,061 706,100.00 7.143% CLARO P. RAMIREZ 7,061 706,100.00 7.143% TOTAL 98,850 P9,885,000.00 100% ====== =========== ====== In support of your request, you submitted to this Office the following documents: 1) Articles of Incorporation of C. Ramirez & Co., Inc.; 2) Copy of the Transfer Certificate of Title; 3) Copy of the Tax Declarations; 4) Copy of the Deed of Assignment; 5) Application and Joint Certification notarized on November 6, 2008; and 6) 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, as amended, 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 by which as a result of such exchange, said person, alone or together with others, not exceeding four persons, gains 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 transferors. 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. Accordingly, no gain or loss shall be recognized both on the transferors and the transferee corporation on the transfer by Luisa P. Ramirez, Claudio P. Ramirez III, Carlos P. Ramirez, Cesar P. Ramirez, Conrado P. Ramirez, Camilo P. Ramirez and Claro P. Ramirez of their parcel of land in exchange for the shares of stock of C. Ramirez & Services Co., Inc., considering that as a consequence of the exchange, they, gained control of the transferee corporation by owning 100% of its total voting stocks. It should be emphasized, however, that Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended, merely defer 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 transferors 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, as amended]. acEHCD Applying the foregoing in the instant case, the basis of the shares of stock received by Luisa P. Ramirez, Claudio P. Ramirez III, Carlos P. Ramirez, Cesar P. Ramirez, Conrado P. Ramirez, Camilo P. Ramirez and Claro P. Ramirez upon the exchange shall be the same as the basis of the properties transferred to C. Ramirez & Co., Inc. thus, Transferors Property No. of Shares Substituted Allocated Basis LUISA P. RAMIREZ 57.14% of land 17,200 P7,751,571.60 covered by TCT No. RT-73610 (340029) PR-20327 CLAUDIO P. RAMIREZ III 7.14% of land 2,150 968,946.40 covered by TCT No. RT-73610 (340029) PR-20327 CARLOS P. RAMIREZ 7.14% of land 2,150 968,946.40 covered by TCT No. RT-73610 (340029) PR-20327 CESAR P. RAMIREZ 7.14% of land 2,150 968,946.40 covered by TCT No. RT-73610 (340029) PR-20327 CONRADO P. RAMIREZ 7.14% of land 2,150 968,946.40 covered by TCT No. RT-73610 (340029) PR-20327 CAMILO P. RAMIREZ 7.14% of land 2,150 968,946.40 covered by TCT No. RT-73610 (340029) PR-20327 CLARO P. RAMIREZ 7.14% of land 2,150 968,946.40 covered by TCT No. RT-73610 (340029) PR-20327 TOTAL 30,100 P13,565,250.00 ====== ============= On the other hand, the basis of C. Ramirez & Co., Inc. of the property it received upon the exchange shall be the original acquisition cost or adjusted cost basis of the transferors of the property exchanged is P2,713,050.00. Moreover, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gains provided for under Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended, they should comply with the requirements hereunder mentioned: A. The transferors 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. 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 transferors; 2. A statement of the original acquisition cost or other basis of the property in the hands of the transferors 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 transferors in the exchange; and c. The fair market value as of the date of the exchange of the capital stock issued to the transferors. 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 stamp 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 properties are subsequently transferred to another transferee. Further, the parties herein shall, pursuant to Section 58 (E) of the Tax Code of 1997, as amended, cause the Register of Deeds to annotate on the Transfer Certificates of Title and/or the Corporate Secretary to annotate at the back of the Certificates of Stock, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties 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. Furthermore, it is 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 Transfer Certificates of Title/Certificates of Stock, in respect of the transferred properties and shares of stock of transferee corporation. On the other hand, the above transfer of property by Luisa P. Ramirez, Claudio P. Ramirez III, Carlos P. Ramirez, Cesar P. Ramirez and Conrado P. Ramirez in favor of C. Ramirez & Co., Inc. is exempt from the DST in accordance with Section 199 (m) of the Tax Code, as amended by Republic Act No. 9243, in relation to Section 40 (C) (2) of the same Tax Code. However, the original issuance of C. Ramirez & Co., Inc. shares shall be subject to DST at the rate of P1.00 per P200.00, or fractional part thereof, of the par value of such shares of stock as impose under Section 174 of the Tax Code of 1997, as amended. Finally, the proportionate share of the other transferor-stockholders, Camilo P. Ramirez and Claro P. Ramirez (7.14% of the aggregate zonal value of the property transferred to C. Ramirez & Co., Inc. in exchange for its shares of stock), being not qualified to be exempt under Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended, as they already exceed the maximum number of transferors allowed therein, shall each be subject to the capital gains tax and documentary stamp tax in the amount of P116,273.57 and P29,068.39, respectively, imposed under Section 24 (D) (1) and 196 of the Tax Code of 1997, as amended, at the rate of 6% and 1.5% respectively, based on the fair market value prevailing at the time of transfer or conveyance of said properties. In addition to the taxes herein due, corresponding penalties, surcharge and interest shall be imposed reckoned from the date of execution of the Deed of Assignment if there is a delay in the presentation of the same to the BIR. The penalties, surcharge and interest shall be based on the value of the properties prevailing at the time of the transaction. 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 are not complied with, then this ruling shall be considered null and void. IHEAcC Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service