BIR Ruling No. 166-84

October 17, 1984 BIR RULING NO. 166-84 35 (a) (b)-000-00-166-84 Gentlemen : This refers to your letter dated September 12, 1984 stating that your clients, the seven (7) Villonco brothers and sisters, namely: Romeo Villonco, Nelly V. Katigbak, Adelina V. Villegas, Vicente Villonco, Nida V. Alsate, Ofelia V. Viola and Teofilo Villonco ( hereinafter referred to as the Hermanos), were the co-owners, pro-indiviso, share-and-share alike of certain real and personal properties acquired by them by succession to the estate of their late father, or by donation from their late mother, on which the corresponding transfer taxes (estate and inheritance taxes, and gift taxes) had been paid; that they organized the following corporations, viz: (1) VRC Realty Corporation (VRC) (2) Chinaville Commercial Corporation (CCC) (3) Gandesville Development Corporation (GDC) (4) Life Theater, Inc. (LIFE) (5) Vilco Commercial & Development Corporation (VILCO) cdtech of which they are the only registered stockholders with equal stockholdings/equities, to which they assigned some of their said property, putting up common funds in payment of their individual subscriptions, maintaining their co-ownership with respect to the other common assets and deferring their partition at some future time when it would be more convenient; that as the only surviving heirs of their late mother, the Hermanos have succeeded to the residue of her estate in equal pro-indiviso shares, now the subject of judicial settlement in Special Proceedings No. 9641 of the Regional Trial Court, Br. 153, Pasig, Metro Manila; that all of the aforementioned property co-owned, pro-indiviso , share-and-share alike by the Hermanos constituted their so-called community of interest (hereinafter referred to as community) which they have now decided to partition and, in the implementation thereof, they will create seven (7) individual units for distribution among the seven (7) of them such that of the five (5) corporations which they have organized, four (4) will represent four (4) units, the 5th will represent two (2) units with equal equities, and part of the estate of their late mother will form as the 7th unit; that in order to arrive at a fair and equitable partition and distribution, each unit will have substantially the same networth so that whoever among the Hermanos gets any unit will be considered to have received in full his share in the community ; that to effect this equalization in values of the Hermanos' respective shares in the community, some co-ownership assets, e.g., shares of stock and real property, will be assigned by them or anyone of them to a unit to make up for a deficiency in its networth so that, in effect, no co-owner/co-heir will get more than the share of his other co-owners/co-heirs; that there will, however, be no consideration passing from one to the other of the Hermanos in connection with the said assignments for the reason that they would be executed merely in implementation of the project of partition, which has for its goal the equalization in value of the Hermanos' respective shares in the community: and that the Hermanos will distribute the seven (7) units among themselves through a raffle and they will execute a Deed of Partition containing stipulations of assignments of interest in shares of stock, in the co-ownership assets involved in the project and in the estate of their mother. Based on the foregoing representations, you request a ruling on the tax consequence of the partition of your clients' community of interest. In reply, please be informed 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 the Hermanos, it appearing that such assignments are without any consideration and they are made merely to equalize the values of each of the seven (7) units respectively adjudicated to the Hermanos in accordance with the Project of Partition in this case to the end that no Hermanos shall get more than the fair share of the others. It is, however, understood in this connection that if after the said partition, any of the Hermanos should sell or exchange the property allocated to him, he 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 or adjusted cost basis pursuant to Section 35(a) and (b) of the Tax Code as amended. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner