Tax Consequence of the Transfer of the Inventory and Other Net Assets of BJI to Metrolab

March 27, 1989 BIR RULING NO. 044-89 34 (c) (2) (c) 031-A-89 044-89 Gentlemen : This refers to your letters dated January 19, 1988 and November 23, 1988 requesting confirmation of your opinion to the effect that no gain or loss shall be recognized in the transfer of Berli Jucker Industries, Inc. (BJI) of its inventory and net other assets to Metrolab Industries, Inc. (Metrolab) in exchange for the latter's shares of stock as a result of which BJI gained control of Metrolab. cdtech It is represented that BJI is a domestic corporation established and organized in June 1973 for the primary purpose of engaging in the business of manufacture, import, export, buy, sell, trade, alter, package, bottle, fabricate or otherwise deal in wholesale business in goods, wares, merchandise and products of every kind and description, including, but not limited to soap, personal hygiene products, pharmaceuticals and chemicals; that Metrolab is a domestic corporation established and organized in October 1986 for the primary purpose of engaging in the business of manufacturing drugs, pharmaceutical and medicinal preparation, druggist's sundries, chemicals, extracts, tinctures, ointments, liniments, toilet articles, surgical and hospital supplies, orthopedic appliances, physicians and hospital supplies, cosmetics, soaps, solvents and other articles or goods pertaining to the drug business; that the original authorized capital stock of Metrolab is P480,000.00 divided into 48,000 shares of common stock with a par value of P10.00 per share; that on October 14, 1986, Metrolab increased its authorized capital stock from P480,000.00 to P1,900,000.00 divided into 190,000 shares of common stock with the same par value per share which increase was approved by the Securities and Exchange Commission on March 4, 1987; that as of December 31, 1987, of the capital stock of 190,000 shares, BJI directly and through its nominees, has subscribed to and paid for in full a total of 135,940 shares as follows: Percentage of Names No. of Shares Holdings BJI 135,932 99.99% Thomas Y. Yasuda 1 Rodolfo C. Salazar 1 Herbert Dee 1 Geronimo de los Reyes, Jr. 1 Manuel V. Pangilinan 1 Albert del Rosario 1 Antonio A. Picazo 1 Luis F. Garcia 1 Total 135,940 100% ======= ====== that on January 1, 1988, BJI transferred its inventory of P18,217,000.00 and net other assets amounting to P486,000.00 to Metrolab in exchange for 18,703 shares in Metrolab; that BJI also subscribed and paid in cash 210 shares for P210,000.00; that the nominal shareholders of Metrolab were reduced from 8 to 5 on January 1, 1988; that with the exception of Messrs. Salazar and Garcia, all nominal shareholders were changed and now nominal shareholders were taken in the persons of Ms. Lourdes C. Rausa and Messrs. David W. Turner and Victor B. Vidarte; that as a result of the transfer of inventory and net other assets to Metrolab in exchange of its additional shares of stock the composition and percentage of shareholdings in Metrolab are as follows: No. of Shares Percentage of Name Subscribed Holdings Berli Jucker Industries, Inc. 154,848 99.99% David W. Turner 1 Rodolfo C. Salazar 1 Luis E. Garcia 1 Ma. Lourdes C. Rausa 1 Victor B. Vidarte 1 _______ _______ 154,853 100% ====== ====== that as a consequence of the transfer of the inventory and net other assets of BJI to Metrolab in exchange of its additional shares of stock, the former gained control of the latter; that subsequently, certain changes in the valuation of inventories and other assets of BJI took place, the changes of which are as follows: Description From To Inventory P18,217,000.00 P15,919,000.00 Net Other Assets 486,000.00 2,767,000.00 Metrolab shares 18,703 shares 18,686 shares Additional subscription 210 shares 477 shares Paid in cash 210,000.00 477,000.00 that BJI and Metrolab agreed that after deducting from the advances of BJI to Metrolab (including the advances of BJI to Novel and Vitamix, now a liability of Metrolab to BJI), the sum of P59,788,000.00 representing the indebtedness of BJI to the Banks and other creditors assumed by Metrolab, the remaining balance of the advances in the amount of P6,678,000.00 is converted into 6,678 shares of Metrolab subscribed by and issued by BJI, and that as a result of the foregoing changes, the composition and percentage of shareholdings in Metrolab reads as follows: No. of Shares Percentage of Name Subscribed Holdings Berli Jucker Industries, Inc. 161,776 99.99% David W. Turner 1 Rodolfo C. Salazar 1 Luis E. Garcia 1 Ma. Lourdes C. Rausa 1 Victor B. Vidarte 1 161,781 100% ====== ===== In reply, I have the honor to inform you that pursuant to Section 34, paragraph (c)(2)(c) of the Tax Code, as amended by Republic Act. No. 4522 and P.D. Nos. 1705 and 1773, 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, 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 stock received, i.e., subscribed, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized both to the transferor and transferee corporation on the transfer by Berli Jucker Industries, Inc. of its inventory and net other assets in payment for the additional shares of stock of Metrolab Industries, Inc., considering that after the exchange of properties and as a result of said exchange, BJI gained control of Metrolab. It should be emphasized, however, that Section 34(c)(2)(c) of the Tax Code merely defers recognition of 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 the stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by it in the exchange, it shall be subject to income tax on the gains derived from such sale or exchange, taking into consideration that the cost basis of the shares of stock shall be the same as the original acquisition cost or adjusted cost basis to the transferor of the properties exchanged therefor; and that the cost basis to the transferee of the properties exchanged for stocks shall be the same as it would be in the hands of the transferor. [Section 34(c)(5)(a) and (b), Tax Code, as amended by Presidential Decree No. 1773] In this connection, 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 34(c)(2)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned: a) The transferor must file with its income tax return for the taxable year in which the exchange was consummated a complete statement of all facts pertinent to the exchange, including: 1. A description of the property transferred, or of its interest in such property, together with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfer; 2. The kind of stock received and preference, 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 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 numbers of shares issued to the transferor in the exchange; and c) The fair market value as of the date of exchange of the capital stock issued to the transferor. In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers participating in the exchange, showing the information listed in order to facilitate the determination of gain or loss from a subsequent disposition of stocks/properties received in the exchange. Moreover, the certificates of stocks to be issued by Metrolab Industries, Inc. are in all probability, original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. Finally, under Section 248(d) in relation to Section 173 of the Tax Code, as amended by Executive Order No. 273, in case of failure to affix the proper documentary stamp tax to a document or instrument, there shall, for every violation, be imposed, in addition to the amount of documentary stamp tax required to be paid, an amount equivalent to 25% of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Very truly yours, (SGD.) JOSE U. ONG Commissioner