Taxability of the Transfer of Shares of Stock by a Person in Exchange for Shares of Stock of a Corporation

February 27, 1992 BIR RULING NO. 071-92 34 (c) (2) (c) 149-91 071-92 Fernandez, Santos & Lopez 20th/21st Floors, Metrobank Sen. Gil J. Puyat Avenue Makati, Metro Manila Attention: Mr . Virgilio R . Santos Partner Gentlemen : This refers to your letter dated August 27, 1991 requesting for a confirmation of your opinion that the transfer of shares of stock by a person in exchange for shares of stock of a corporation of which as a result of the exchange said person, alone or with others, not exceeding four persons, gains control of said corporation is not subject to capital gains tax. It is represented that Lapanday Holding Corporation (Lapanday) a domestic corporation and duly registered with the Securities and Exchange Commission, has authorized capital of P320,000,000 divided into Thirty two million (32,000,000) shares represented by nineteen million two hundred thousand (19,200,000) shares Class "A" capital stock and twelve million eight hundred thousand (12,800,000) shares Class "B" capital stock with voting rights and privileges both with a par value of P10 per share; that the following are the stockholders of the corporation with the corresponding number and amount of shares subscribed and paid up, viz: No. of shares Amount Amount Unpaid Stockholders Subscribed Subscribed Paid-in Subscription Luis F. Lorenzo, Sr. A-1,200,000 P12,000,000 P3,000,000 9,000,000 Alicia P. Lorenzo A-1,200,000 12,000,000 3,000,000 9,000,000 Luis P. Lorenzo, Jr. A-1,200,000 12,000,000 3,000,000 9,000,000 Regina A. L. Davila A-1,200,000 12,000,000 3,000,000 9,000,000 Marco P. Lorenzo A-1,200,000 12,000,000 3,000,000 9,000,000 Lourdes B.P. Lorenzo A-1,200,000 12,000,000 3,000,000 9,000,000 Jose Paulo P. Lorenzo A-1,200,000 12,000,000 3,000,000 9,000,000 Martin I. P. Lorenzo A-1,200,000 12,000,000 3,000,000 9,000,000 Tomas A.P. Lorenzo A-1,200,000 12,000,000 3,000,000 9,000,000 Luisa M.P. Lorenzo A-1,200,000 12,000,000 3,000,000 9,000,000 Bohrer Int'l. S.A. B-8,000,000 80,000,000 80,000,000 20,000,000 200,000,000 110,000,000 90,000,000 ======== ========= ========= ======== that Lapanday is planning to increase its Authorized Capital Stock from P320,000,000 to P1 billion, divided into 60,000,000 Class "A" shares and 40,000,000 Class "B" shares both with a par value of P10 per share; that the following stockholders would like to subscribe in the additional capital stock of the corporation as follows: No. of shares Class of Par Amount Stockholder Subscribed Stock Value Subscribed Luis F. Lorenzo, Sr. 174,000 A P10 P 1,740,000 Alicia P. Lorenzo 2,539,045 A 10 25,390,450 Luis P. Lorenzo, Jr. 9,752,264 A 10 97,522,640 Regina L. Davila 1,837,727 A 10 18,377,270 Marco P. Lorenzo 1,631,780 A 10 16,317,800 Lourdes B.P. Lorenzo 1,718,911 A 10 17,189,110 Jose Paulo P. Lorenzo 2,130,807 A 10 21,308,070 Martin I.P. Lorenzo 1,837,727 A 10 18,377,270 Tomas A.P. Lorenzo 1,837,727 A 10 18,377,270 Luisa M.P. Lorenzo 1,718,911 A 10 17,189,110 25,178,899 P251,788,990 ======== ========== that in consideration of the above subscription the stockholders will exchange their shares of stock in other corporation as payment for the said subscription. The details of the said payment scheme are shown below: Value of Shares of Stock Exchanged Balance Amount for Shares of of Unpaid Stockholders Subscribed Stock Subscription Luis F. Lorenzo, Sr. P 1,740,000 P 1,740,000 P Alicia P. Lorenzo 25,390,450 19,051,310 6,339,140 Luis P. Lorenzo, Jr. 97,522,640 40,307,649 57,214,991 Regina L. Davila 18,377,270 14,569,295 3,807,975 Narco P. Lorenzo 16,317,800 13,357,957 2,959,843 Lourdes B.P. Lorenzo 17,189,110 13,852,381 3,336,729 Jose Paulo P. Lorenzo 21,308,070 16,291,539 5,016,531 Martin I. P. Lorenzo 18,377,270 14,569,295 3,807,975 Tomas A.P. Lorenzo 18,377,270 14,569,295 3,807,975 Luisa M.P. Lorenzo 17,189,110 13,852,381 3,336,729 P251,788,990 P162,161,102 P89,627,888 ========== ========== ========= that after the exchange, the details of the capital stock of Lapanday Holding Corporation would be as follows: Percentage Amount Amount Unpaid To Total Stockholders Subscribed Paid-In Subscription Shares Luis F. Lorenzo, Sr. P 13,740,000 P 4,740,000 P 9,000,000 3.04% Alicia P. Lorenzo 37,390,450 22,051,310 15,339,140 8.28% Luis P. Lorenzo, Jr. 133,786,740 67,571,749 66,214,991 24.24% Regina L. Davila 30,377,270 17,569,295 12,807,975 6.72% Marco P. Lorenzo 28,317,800 16,357,957 11,959,843 6.27% Lourdes B.P. Lorenzo 29,189,110 16,852,381 12,336,729 6.46% Jose Paulo P. Lorenzo 33,308,070 19,291,539 14,016,531 7.38% Martin I.P. Lorenzo 30,377,270 17,569,295 12,807,975 6.72% Tomas A.P. Lorenzo 30,377,270 17,569,295 12,807,975 6.72% Luisa M.P. Lorenzo 29,189,110 16,852,381 12,336,729 6.46% Bohrer Int'l. S.A. 80,000,000 80,000,000 17.71% P451,783,990 P272,161,102 P179,627,883 100% ========== ========== ========== ====== In reply, I have the honor to inform you that pursuant to Section 24 paragraph (c)(2)(c) of the Tax Code, as amended by Republic Act No. 4522 and Presidential Decree 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 "property" includes shares of stock and 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, whether for property or for services by the transferor or 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 to the transferors-stockholders and the transferee corporation on the transfer by the former of their stocks in another corporation in exchange for shares of stock of Lapanday Holding Corporation considering that after the exchange of stocks/properties and as a result of the exchange, not more than five of the transferors-stockholders will gain control of the transferee corporation by owning at least 51% of the total voting power of all classes of stocks entitled to vote. 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/stocks or of the stocks involved in the exchange, the original or historical cost of the properties or stock is considered. Thus, if the transferors later sell or exchange the shares of stock acquired by them in the exchange transactions, they 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 transferors of the properties/stocks exchanged therefor; and that the cost basis to the transferee of the properties/stocks exchanged for stocks shall be the same as it would be in the hands of the transferors. [Section 34 (c)(5)(a) & (b), Tax Code as amended by PD No. 1773] In this connection, you are further advised that in order that the parties to the exchange transactions can avail of the non-recognition of gains provided for in Section 34(c)(2)(c) of the Tax Code, 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 transactions were consummated a complete statement of all facts pertinent to the exchange transactions, including: 1. A description of the stocks transferred, or of their interest in such stocks, together with a statement of the original acquisition cost or other basis thereof at the time of transfer; 2. The kind of stocks 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. On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange transactions were consummated the following: 1. A complete description of all stocks received from the transferors; 2. A statement of the original acquisition cost or other basis thereof in the hands of the transferors and the adjusted cost basis at the time of transfer; 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 each exchange transaction, with complete description of each class of stock; (b) The classes of stock and number of shares issued to the transferors in the exchange transactions; and (c) The fair market value as of the date of each exchange transaction of the capital stock issued to the transferors. In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers participating in the exchange transactions, showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of stocks/properties received in the exchange transactions. The parties shall also cause to be annotated on the Transfer Certificate of Titles and at the back of the Certificate of stocks, the date the deed of exchange was executed, the original or historical cost of acquisition of the shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange. Finally, the certificates of stocks to be issued by Lapanday pursuant to the said exchange transactions are in all probability, original issues which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. 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 is not complied with, then this ruling shall be considered null and void. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue