Tax Consequences of the Contemplated Transfer

April 26, 1989 BIR RULING NO. 084-89 34 (c) (2) (c) 330-88 084-89 Gentlemen : This refers to your letters dated February 16, 1989 and February 21, 1989, requesting a ruling on the tax consequences of the contemplated transfer under Section 34(c)(2)(c) of the National Internal Revenue Code as amended by (1) the Lorenzo Family, (2) Eurolife Limited (HK), and (3) Cadeco Agro-Development Phils., Inc., of their shares in the capital stock of Surfield Development Corporation (Surfield) to Macondray Holdings Corporation (Macondray) in exchange for shares of stock of the latter corporation. aisadc It is represented that the Lorenzo Family shall subscribe to and purchase at par value of P1.00 per share an aggregate of 4,500,000 shares of Class "A" Stock in Macondray, and in full payment thereof, the Lorenzo Family shall assign, transfer and convey to Macondray an aggregate of 3,400,000 fully paid shares of stock in Surfield with total book value of at least P4,500,000.00; that each of the ten (10) Lorenzo family members will subscribe to 450,000 Macondray shares and each of them will transfer 340,000 Surfield shares to Macondray in payment of their subscriptions; that on the other hand, Eurolife Ltd. (HK) shall subscribe to and purchase at par value of P1.00 per share an aggregate of 8,000,000 shares of Class "B" Stock in Macondray, and in full payment thereof, Eurolife Ltd., shall assign, transfer and convey to Macondray an aggregate of 6,000,000 fully paid shares of stock in Surfield, with a total book value of at least P8,000,000.00; that Cadeco Agro-Development Phils., Inc., shall transfer to Macondray an aggregate of 1,500,000 shares of stock in Surfield, with a total book value of not less than P1,875,000.00 in full payment of the balance of its unpaid subscription to Macondray stock; which unpaid subscription balance amounts to P1,875,000.00; that by such transfer of the Surfield shares, Cadeco's entire holdings of 12,600,000 shares of Macondray stock will have been fully paid; that the resulting holdings in Macondray will be as follows: Additional Macondray shares to be Beginning issued for Resulting Share- Surfield Share- Stockholders holdings Shares holdings Luis F. Lorenzo 2,415,000 450,000 2,865,000 Luis P. Lorenzo, Jr. 19,165,000 450,000 19,615,000 Alicia P. Lorenzo 1,165,000 450,000 1,615,000 Regina L. Davila 1,165,000 450,000 1,615,000 Marco A.P. Lorenzo 1,165,000 450,000 1,615,000 Lourdes B.P. Lorenzo 1,165,000 450,000 1,615,000 Jose Paulo P. Lorenzo 1,165,000 450,000 1,615,000 Martin I.P. Lorenzo 1,165,000 450,000 1,615,000 Luisa M. Lorenzo 1,165,000 450,000 1,615,000 Tomas A.P. Lorenzo 1,165,000 450,000 1,615,000 La Panday Holdings Corp. 11,999,999 11,999,999 CADECO Agro-Development Phils., Inc. 12,600,000 12,600,000 Jesus M. Manalastas 3,000,000 3,000,000 Edmundo T. Lim 1 1 Eurolife Ltd. 8,000,000 8,000,000 TOTAL 58,500,000 12,500,000 71,000,000 ========= ======== ======== and that as a result of the said contemplated transfers, four (4) stockholders who will transfer Surfield shares namely, Luis F. Lorenzo, Luis P. Lorenzo, Jr. Eurolife Ltd., and Cadeco will have 60.67% of the total voting stock in Macondray and therefore further gain control of Macondray in accordance with Section 34(c)(2)(c) of the National Internal Revenue Code as amended. 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 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 "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 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 transferors and transferee corporation on the transfer by the Lorenzo Family, Eurolife Limited (HK) and Cadeco Agro-Development Phils., Inc. of their Surfield shares of stock in exchange for the shares of stock of Macondray and in payment of subscription payable therein considering that as a result of the said exchange, even just 4 or not more than 5 of the transferors will gain another control of the transferee corporation. 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 transferors later sell or exchange the shares of stock acquired by them in the exchange, 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 exchanged for stocks shall be the same as it would be in the hands of the transferors. [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 transferors must file with their income tax returns 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 properties transferred, or of their interest in such properties, together with a statement of 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 par 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 all properties received from the transferors; 2) A statement of the original acquisition cost or other basis of the properties 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 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 exchange 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; showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of stocks/properties received in exchange. Moreover, the certificates of stocks to be issued by Macondray Holdings Corporation are, in all probability, original issues, which are subject to the documentary stamp tax imposed by Section 188 of the Tax Code, as amended. Furthermore, 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 to a document or instruments, there shall, for every violation to be imposed, in addition to the amount of documentary stamp tax required to be paid an amount equivalent to twenty-five percent of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Finally, since, as represented, the transaction covered by BIR Ruling No. 561-88 dated November 28, 1988 have not been implemented and have been modified by the transactions involved in this ruling, said BIR Ruling No. 561-88 is hereby revoked. Very truly yours, (SGD.) JOSE U. ONG Commissioner