Gain or Loss Recognized in the Transfer of Transaction of the Shares of Stock

August 8, 1989 BIR RULING NO. 160-89 34 (c) (2) (c) 330-88 160-89 Gentlemen : This refers to your letter dated April 17, 1989 stating that CFC Corporation (CFC) and Universal Robina Corporation (URC) are domestic corporations whose equity ownership are as follows : cdtech CFC Percentage of Equity Ownership Name of Stockholders March 15, 1989 Universal Robina Corporation 55.85 Others 44.15 100.00 ===== Total Outstanding Shares 3,032,262 ======= CFC Stockholders' Equity 9/30/87 P1,246,188,292.00 ============== URC Percentage of Equity Ownership Name of Stockholders March 15, 1989 John Gokongwei, Jr. 60.45 Henry L. Go 16.89 CFC Corporation 11.11 Johnson Robert L. Go 5.33 James L. Go 4.44 Edward Go 0.89 Lily Ngochua 0.89 Juanita Marquez Lim 0.00 100.00 Total Outstanding Shares 594,304,606 ========= URC Stockholders' Equity 9/30/87 P2,250,969,301.00 ============== that both CFC and URC are principally engaged in the food manufacturing business; that in the reorganization plan URC will distribute as property dividends all its CFC shares to URC stockholders; that CFC shares to be received by CFC as a stockholder of URC will also be distributed by CFC as property dividends to its stockholders; that a holding Company (H Co.) will initially be incorporated by certain individuals under Philippine Laws; that thereafter, all the stockholders of URC, except CFC, and all the stockholders of CFC will subscribe to an increase in the capital stock of H Co. by transferring their shares in URC and CFC, respectively, to H Co. solely in exchange for shares of stock of H. Co. in one transaction; that CFC will waive its right to subscribe to the increase in the capital stock of H. Co.; that while there will be approximately 70 transferors comprising the URC and CFC stockholders, not more than five transferors, that is the majority shareholders, of URC, will gain more than 51% of the voting stock of H. Co. thus, the control of H. Co.; that the shares of URC and CFC will be transferred by their respective stockholders at book value as shown in the audited financial statements of URC and CFC for the period ended September 30, 1987 as adjusted for any subsequent stock issuance or reacquisition at the time of exchange; that subsequently, CFC plans to distribute its URC shares as property dividends to H. Co.; that after the conclusion of the above transfers, exchange and distributions, URC and CFC will be held by H. Co. and H Co. will be held by the former URC and CFC stockholders; that without the original URC majority transferors losing control of H Co., the stockholders of H Co. plan to offer eventually a portion of their shares of stock in H Co. to the public by way of listing in the stock exchange; that presently, URC and CFC are essentially closely held corporations and it was deemed a sound corporate policy to open the corporation to the investing public; that this can be achieved better and expeditiously if CFC and URC are consolidated under the umbrella of a holding company whose shares can be listed in the stock exchange; and that URC and CFC are all operating at a net income position. Based on the foregoing representations, you now request confirmation of your opinion, viz: 1. No gain or loss shall be recognized to the URC stockholders and all CFC stockholders for the transfer in one transaction of their shares of stock in URC and CFC, respectively, solely in exchange for shares of H Co. pursuant to Section 34(c)(2) of the Tax Code; 2. The basis of H Co. stock in the hands of URC stockholders and CFC stockholders shall be the same as their basis in URC and CFC stocks exchanged pursuant to the above plan of reorganization; 3. The basis of URC and CFC stock in the hands of H Co. shall be the same as it would be in the hands of URC and CFC stockholders; 4. The transfer of their shares of stock by URC and CFC stockholders for H Co. shares will not be considered as a transfer of property for an insufficient consideration subject to gift tax since there is no intention to donate on the part of any of the parties and the transaction is effected purely for business reasons; 5. The distribution of property dividends by URC, of all its shares of stock in CFC to URC's own stockholders will not be subject to income tax under existing provisions of the NIRC. Based on the audited financial statements of URC for the year ended September 30, 1987, URC has sufficient retained earnings to cover its cost basis in CFC stocks to be dividend out to URC's stockholders; 6. The distribution of CFC of its URC shares as property dividends to H Co. is not subject to income tax under existing provisions of the NIRC; and 7. The subsequent sale or exchange of H Co. stockholders of their listed H Co. shares through the facilities of the stock exchange shall be subject to a tax of 1/4 of 1% of the gross selling price of the shares or to the tax laws then existing at the time of such sale or disposition. 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 which means that any number of persons may exchange property for stock provided that, as a result of the transaction, not more than five (5) transferors would control the 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. Accordingly, no gain or loss shall be recognized to each of the seventy (70) transferors (URC and CFC stockholders) and the transferee corporation, H Co. considering that after the exchange and as a result of the said exchange, not more than five (5) of the transferors will gain control of the transferee corporation. 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. 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, your opinion that 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 therefor; and that the cost basis to the transferee of the properties exchanged for stock shall be the same as it would be in the hands of the transferors is likewise confirmed. [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 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 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 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 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, your opinion to the effect, viz: 1) That the transfer of shares of stocks by URC and CFC stockholders for H Co. shares will not be considered as a transfer or property for an insufficient consideration subject to gift tax under Section 93 of the Tax Code, as amended since there is no intention to donate on the part of any of the parties and the transaction is effected purely for business reasons; 2) That the distribution as property dividends by URC, of all its shares of stock in CFC to URC's own stockholders will not be subject to income tax since under Section 21(c)(2) of the Tax Code, as amended dividends received from a domestic corporation shall be taxed at the rate of 0% effective January 1, 1989; 3) That the distribution of CFC of its URC shares as property dividends to H Co. is not subject to income tax since under Section 24(c)(4) of the Tax Code, as amended, dividends received by a domestic corporation from another corporation shall not be subject to tax; and 4) That the subsequent sale or exchange of H Co. stockholders of their H Co. shares through the facilities of the stock exchange shall be subject to a tax of 1/4 of 1% based on the gross selling price of the shares under Section 21(d)(2) of the Tax Code, as amended, or to the tax laws enforced at the time of such sale or disposition, are hereby confirmed. Furthermore, the certificates of stocks to be issued by H Co. 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 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 twenty-five percent of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. cdt Very truly yours, (SGD.) JOSE U. ONG Commissioner