No Gain or Loss on Transfer of Property for Shares of Stocks

April 22, 1993 BIR RULING NO. 136-93 NO GAIN OR LOSS ON TRANSFER OF PROPERTY FOR SHARES OF STOCKS 34 (c) (2) (C) 081-93 136-93 Sycip, Salazar, Hernandez & Gatmaitan 105 Paseo de Roxas 1200 Makati, Metro Manila Attention: Atty . Marilyn A . Victorio-Aquino and Atty . Ernesto S . Tiano, Jr . This refers to your letter dated March 11, 1993 requesting confirmation of your opinion that the assignment and transfer on March 4, 1993 by Oriental Petroleum and Minerals Corporation (OPMC) of its working interest in blocks A & B and C of Service Contract No. 14 Offshore NW Palawan dated December 17, 1975, as amended (the property) to Linapacan Oil Gas and Power Corporation (LOGPOCOR) in exchange for 80 billion shares of stock of LOGPOCOR in accordance with Revenue Memorandum Order No. 26-92, is a tax-free exchange transaction under Section 34(c) (2) (c) of Tax Code, as amended. aisadc It is represented that LOGPOCOR is a domestic corporation duly registered with the Securities and Exchange Commission; that it is a wholly-owned subsidiary of OPMC and has an authorized capital stock of P1,000,000.00 divided into 60,000,000 shares of Class "A" Common Stock and 40,000,000 Class "B" Common Stock, both classes of shares with a par value of P0.01 per share of which P1,000,000.00 worth of shares were subscribed and paid as follows: No. of Shares Name Class A Class B Amount Paid Oriental Petroleum and 59,999,300 40,000,000 P999,993.00 Minerals Corporation and its nominees Roberto Coyiuto, Jr. 100 1.00 Ramon M. Garcia 100 1.00 Manuel D. Recto 100 1.00 Antonio H. Ozaeta 100 1.00 Leandro Verceles 100 1.00 Carlos Dyhongpo 100 1.00 Amparo V. Barcelon 100 1.00 Total 60,000,000 40,000,000 P1,000,000.00 ======== ======== =========== that the aforesaid authorized capital stock will be increased to P1,000,000,000.00 divided into 60,000,000,000 shares of Class "A" Common stock and 40,000,000,000 Class "B" Common stock, both classes of shares with a par value of P0.01 per share; that the stockholders of LOGPOCOR after the proposed increase in capital will be as follows: No. of Shares Name Class A Class B Amount Paid Oriental Petroleum and 59,999,999,300 20,100,000,000 P200,999,993.00 Minerals Corporation and its nominees Roberto Coyiuto, Jr. 100 1.00 Ramon M. Garcia 100 1.00 Manuel D. Recto 100 1.00 Antonio H. Ozaeta 100 1.00 Leandro Verceles 100 1.00 Carlos Dyhongpo 100 1.00 Amparo V. Barcelon 100 1.00 Total 60,000,000,000 21,100,000,000 P801,000,000.00 =========== =========== ============= that OPMC owns the Property consisting of all its rights and title in the following ex-Philippine Cities Service, Inc. working interest in Blocks A, B and C of Service Contract No. 14 Offshore NW Palawan dated December 17, 1975 as amended: (a) 0.35 x 52.483 or 18.369% of the Nido Field: (b) 0.35 x 39.575 or 13.851% of the Matinloc oil production complex; (c) 0.35 x 39.575 or 13.851% of Block B; and (d) 0.35 x 36.00 or 12.60% of Block C; that the Property as confirmed by the Department of Energy has a fair market value of P800,000,000.00; that on March 4, 1993, OPMC, represented by its Chairman of the Board and President, Mr. Robert Coyiuto, Jr., executed an Assignment Agreement in favor of LOGPOCOR whereby the OPMC assigned the Property to LOGPOCOR, and LOGPOCOR accepted such assignment, as full payment of the subscriptions of OPMC and its nominees to the increased capital stock of LOGPOCOR in the amount of P800,000,000.00; that this Assignment Agreement of March 4, 1993 was duly approved by the Department of Energy; that as a result of this transaction, OPMC will retain its 100% ownership of the subscribed capital stock of LOGPOCOR (and will hold 80.1% of its authorized capital stock) and will also retain control of LOGPOCOR; and that in support of your request, you submitted to this Office, the following documents: 1. Assignment Agreement dated March 4, 1993 executed by OPMC in favor of LOGPOCOR; 2. Articles of Incorporation of LOGPOCOR and OPMC; 3. Certification as to the original or historical cost of acquisition/adjusted cost basis of the Property; 4. Letter by the Department of Energy dated March 2, 1993 confirming the fair market value of the Property; 5. Certification by the corporate secretary of LOGPOCOR of its authorized capitalization and the par value of the shares of stock of LOGPOCOR; 6. Certification of the resulting percentage equity interest of OPMC in LOGPOCOR as a result of the exchange transaction; and 7. Letter of the Department of Energy to LOGPOCOR as a result March 4, 1993 approving the said Assignment Agreement and recognizing LOGPOCOR as co-Service Contractor in Service Contract No. 14. 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 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, your opinion that no gain or loss shall be recognized both to the transferor and the transferee corporation on the assignment and transfer by the former of its working interest in exchange for shares of stock of transferee corporation, LOGPOCOR considering that after the exchange and as a result of the exchange, the transferor gained control of the transferee corporation, is hereby confirmed. It should be emphasized, however, that Section 34(c)(2)(c) of the Tax Code merely defers recognition of the 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 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 gains derived from such sale or exchange, taking into consideration that the cost basis of the shares shall be the same as the original acquisition cost or adjusted cost basis to the transferors 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 transferors. (Section 34(c)(5)(a) and (b) of the 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 return for the taxable year in which the exchange transaction 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 the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer; 2. The kind of stocks received and preferences, 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 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 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 number of shares issued to the transferors in the exchange; and c. The fair market value as of the date of the 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 the exchange transaction. The parties shall cause the Assignment Agreement to be approved and filed with the Department of Energy and shall also cause the assignment of the property to be annotated at the back of the Certificate of Stocks and recorded in the books of OPMC and LOGPOCOR, 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. 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 are not complied with, then this ruling shall be considered null and void. cdta VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue