Tax Consequence of the Partition by Co-owners of the Life Theater, Inc.

July 22, 1986 BIR RULING NO. 117-86 35 (a) & (b) 166-84 117-86 Gentlemen : This refers to your letter dated May 21, 1986 stating that your clients, the Villonco Hermanos, namely: Romeo Villonco, Nelly V. Katigbak, Adelina V. Villegas, Vicente Villonco, Nida V. Alzate, Ofelia V. Viola and Teofilo Villonco have partitioned their community of interest in five (5) corporations, wherein they each had equal stockholders/equities, and in the residue of the estate left by their late mother, Doa Angela S. Vda, de Villonco, which they classified into seven (7) individual units for disposition among them in such manner that four (4) of the five (5) corporations represented four (4) units, the fifth (5th) corporation two (2) units and the estate of their mother one (1) unit and, in order to equalize the networth of said units some properties owned in common by them share-and-share alike were assigned to the units with deficit values to make up for the deficiency; that their partition has since been implemented wherein the Life Theater, Inc. which represented two (2) units was allotted to Adelina V. Villegas and Vicente Villonco who have now decided to partition the same; that the Life Theater, Inc. has the following assets: cdta "Real Property TCT No. 98170 Manila (The Life Theater) Lot Nos. 1 & 2 Area 1,709.43 sq. m. Market Value P13,320,730.00 (T/D B-030-00560) Improvements Life Bldg. Market Value 2,811,760.00 (T/D B-030-00560) Life Theater Market Value 1,180,225.00 (T/D A-030-01106) P17,312,715.00 TCT No. 128321 Manila (The Life Arcade) Lots No. 3 & 4 Area 1,453.08 sq. m. Market Value P12,199,210.00 (T/D B-030-00567) Improvements Life Arcade 541,320.00 (T/D B-030-00567) P12,740,530.00 (Market valuations are from tax declarations.) "Personal Property Cash on Hand P908,594.53 Receivables 37,500.00 946,094.53 GRAND TOTAL P30,999,339.53 that the said assets have two (2) different and distinct business areas, the theater and the arcade and, with these as bases two independent units have been formed, to wit: "Unit I Life Theater TCT No. 98170 Manila Lots 1 & 2 P13,320,730.00 Life Theater 1,180,225.00 Life Building 2,811,760.00 Receivables 37,500.00 P17,350,215.00 "Unit II Life Arcade TCT No. 128321 Manila Lots 3 & 4 P12,199,210.00 Life Arcade 541,320.00 Cash on Hand 908,594.53 P13,649,124.00" that the Life Theater, Inc. has an authorized capital stock of P10,000,000.00 divided into 100,000 shares with a part value of P100.00 per share; that 94,371 shares worth P9,437,100.00 have been subscribed and of these subscriptions, P5,759,700.00 have been paid leaving an unpaid balance of P3,677,400.00; that each of the parties now own 47,185.5 share of which P2,879,850.00 have been paid with an unpaid balance on the P1,838,700.00; that in the partition, Unit I will be retained by the Life Theater, Inc. as its remaining corporate assets; that the shares of the adjudicatee of Unit II will be assigned or surrendered to the corporation in exchange for Unit II; that the adjudicatee of Unit I will assume the unpaid balances on the subscriptions in the total amount of P3,677,400.00; that this will thus reduce by that much the equity of the adjudicatee of Unit I from P17,350,215.00 to P13,672,815.00; that whoever gets either unit receives a fair share in the partition which will be decided by them through a raffle; that in the partition, the assets composing Unit II will be assigned to the adjudicatee and this requires a deed of assignment by Life Arcade, Inc. of Lots 3 and 4, TCT No. 12831, the Life Arcade and the remittance of P908,594.53 in cash in exchange for the 47,185.5 shares of the adjudicatee; and that the adjudicatee of Unit II, in turn, will execute a deed of assignment of his 47,185.5 shares in favor of Life Theater, Inc. by way of surrender thereof, with the assumption by the adjudicatee of Unit I of the unpaid balance of the subscription thereon in the sum of P1,838,700.00, aside from his/her own unpaid balance of P1,838,700.00. Based on the foregoing representations, you now request a ruling as to the tax consequence of the partition by co-owners Adelina V. Villegas and Vicente Villonco of the Life Theater, Inc. which represented two (2) units. In reply thereto, I have the honor to inform you that for income tax purposes, no gain or loss shall be recognized on the aforementioned assignments of shares of stock and real estate which are commonly and equally owned by Adelina V. Villegas and Vicente Villonco, it appearing that such assignments are without any consideration and they are made merely to equalize the values of Unit I and Unit II so that whoever gets either unit receives a fair share in the partition. It is, however, understood in this connection that if after the said partition, Messrs. Vicente Villonco and Adelina V. Villegas should sell or exchange the property allocated to him/her, he/she shall be subject to income tax on the gain derived from such sale or exchange taking into consideration that the cost basis of the said property shall be its historical/original acquisition cost of adjusted cost basis pursuant to Section 35(a) and (b) of the Tax Code, as amended. cd Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner