The Basis of Property Acquired by Purchase is Its Cost to the Taxpayer Which Includes the Purchase Price Plus Incidental Expenses, if any

February 13, 1995 BIR RULING NO. 019-95 34 (b) 000-00 019-95 Bases Conversion and Development Authority 2/F, Rufino Center, Ayala Avenue Makati, Metro Manila Attention: Mr . Victor A . Lim Chairman Gentlemen : This refers to your letter dated February 8, 1995 stating that the Fort Bonifacio property (Property) is a 214 hectare land owned by the National Government and forming part of a military installation called Fort Bonifacio; that the national Government is transferring the Property to a land holding corporation called Fort Bonifacio Development Corporation (FBDC) for P72 Billion; that FBDC's payment for the property will be evidenced by a Promissory Note in the amount of 72 Billion (PN); that the National Government shall thereafter assign its receivables under the PN to the Bases Conversion and Development Authority (BCDA) as its capital contribution to BCDA; that under Section 6 of the Bases Conversion and Development Act of 1992 (R.A. 7227), the authorized capital of BCDA of P100 Billion may be fully subscribed by the Republic of the Philippines and may be paid up from the proceeds of the sales of the latter's land assets as provided for in Section 8 of said law; that since the PN represents the proceeds of the sale of the Property by the national Government such PN may be conveyed by the National Government to BCDA as its capital contribution thereto; that as the National Government assignee of the receivables under the PN, BCDA will become a creditor of FBDC with respect to said receivables; that in the books of BCDA intends to subscribe to shares of stock of FBDC through the conversion of its receivables under the PN into equity in FBDC; that in consideration for the retirement of FBDC's receivables under the PN with a face amount of P72 Billion, FBDC will issue new shares to BCDA with an aggregate issue value, likewise, of P72 Billion; that FBDC's PN is clearly a "previously incurred indebtedness" which under Section 62 of the Corporation Code may constitute a valid consideration for the issuance of shares of stock; that at the end of the conversion of its receivables/ advances under the PN into equity in FBDC, BCDA will end up owning P72 Billion worth of shares in FBDC; that BCDA will subsequently transfer 55% of its resulting shareholdings in FBDC to Bonifacio Land Corporation (BLC), the holding company of the Metro Pacific Consortium, which was the consortium that won the bidding for the privatization of the Property; and that you are prepared to pay for all the documentary stamp taxes involved in the various transactions, on a one-month deferred payment basis. LibLex In connection therewith, you are requesting confirmation of your opinion that "1. For tax purposes, the cost basis of the Property in the hands of FBDC is P72 Billion, which is equivalent to the amount of its liability under the PN with a face amount of P72 Billion. The amount of said liability is the cost to FBDC of the Property considering that it will incur the said amount (and book the same as a liability in order to acquire the Property.) "2. For tax purposes, the total cost basis of BCDA's resulting shareholdings in FBDC, after the conversion of its "advances" into equity of FBDC, is also P72 Billion, which is equivalent to the face amount of BCDA's "advances" or a receivables under the PN. Accordingly, since BCDA shall transfer to BLC only 55% of its shareholdings in FBDC, for tax purposes, the cost basis to BCDA of such portion of its resulting shareholdings in FBDC to be transferred to BLC is only P39.6 Billion, representing 55% of the total cost basis of BCDA of its resulting share-holdings in FBDC in the amount of P72 Billion." In reply thereto, please be informed that generally, the basis of property acquired by purchase is its cost to the taxpayer which includes the purchase price plus incidental expenses, if any. [Sec. 34, NIRC; Forst, Basic Accounting for Lawyers; U.S. Master Tax Guide (1989 Ed.)] Thus, your opinion on the following : 1. That for tax purposes, the cost basis of the Property in the hands of FBDC is 72 Billion, which is equivalent to the amount of its liability under the PN with a face value of P72 Billion. The amount of said liability is the cost of FBDC of the Property considering that it will incur the said amount (and book the same as a liability in order to acquire the Property; and 2. That for tax purposes, the total cost basis of BCDA's resulting shareholdings in FBDC, after the conversion of its "advances" into equity of FBDC, is also P72 Billion, which is equivalent to the face amount of BCDA's "advances" or receivables under the PN. Accordingly, since BCDA shall transfer to BLC only 55% of its shareholdings in FBDC, for tax purposes, the cost basis to BCDA of such portion of its resulting shareholdings in FBDC to be transferred to BLC is only P39.6 Billion, representing 55% of the total cost basis to BCDA of its resulting shareholdings in FBDC in the amount of P72 Billion. is hereby confirmed. Moreover, the Deed of Conveyance covering the Property to be executed by the National Government in favor of FBDC is subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended, while the PN to be issued by FBDC in favor of the National Government shall be subject to the documentary stamp tax under Section 100 of the Tax Code, as amended. Furthermore, the original issues of certificates of stock by BCDA to the National Government, as well as by FBDC to BCDA and by BLC to BCDA are subject to the documentary stamp tax under Section 175 of the Tax Code, as amended. Finally, the payment of the documentary stamp taxes on a one month deferred payment basis shall be subject to the payment of 25% surcharge and 20% interest under Sections 248 and 249 of the Tax Code, as amended. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue