Tax Consequence of the Transfer of All the Assets

September 10, 1981 BIR RULING NO. 171-81 035-o-2-c 10-81 171-81 Sycip, Gorres, Velayo & Co. P.O. Box 589, Manila Attention: Mr . B . V . Abela Tax Division Gentlemen : This refers to your letter dated May 4, 1981 requesting a ruling on the tax consequence of the plan of your client, the San Miguel Corporation to transfer substantially all the assets of one of its operating divisions to a new corporation. It is represented that, San Miguel Corporation (SMC), a Philippine corporation majority-owned by Filipinos, is a manufacturing concern which operates several independent divisions; that it proposes to transfer all the assets of one of its operating divisions to a new corporation, Coca-Cola Bottlers Phils., Inc. (CCBPI) solely in exchange for shares of stock of CCBPI, which will be jointly owned by SMC, the Coca-Cola Export Corporation-Philippines (TCCEC), resident foreign corporation duly licensed to do business in the Philippines, and Refreshment Sales, Inc. (RSI), a non-resident foreign corporation domiciled in the U.S. and a wholly-owned subsidiary of TCCEC; that the assets to be transferred by SMC will consist of fixed assets (machinery and equipment, transportation equipment, buildings) and non-fixed assets (inventories, accounts receivables, and prepayments); that the assets to be transferred by SMC have outstanding liabilities which will be assumed by CCBPI; that the net assets of SMC will be exchanged at market value for common shares of stock; that TCCEC will also transfer some of its branch assets consisting of machinery and equipment solely for CCBPI stock; that RSI will transfer cash for CCBPI stocks; that with respect to the outstanding liabilities of SMC which will be assumed by CCBPI, a portion of the liabilities will be directly assumed and paid by CCBPI; that due to administrative difficulties such as obtaining consent from many creditors and suppliers, the remaining portion of the liabilities will initially be paid by SMC and CCBPI will subsequently reimburse the same amount to SMC; the transfer of one of the business of SMC into a new company is for the purpose of making it possible for CCBPI to take in new investors; and that after the transfer, CCBPI will be totally owned by SMC, TCCEC, and RSI to the extent of 70%, 2.25% and 27.75% respectively. cdtech In reply thereto, I have the honor to inform you that pursuant to Section 35 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, along or together with others, not exceeding four persons, gains control of said corporation. The term "control" shall mean ownership of stocks vested with at least fifty-one (51%) percent of the total voting power of all classes of stocks entitled to vote. 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 the transferee corporation, on the transfer by SMC and TCCEC of their assets and liabilities in exchange for the shares of stock of CCBPI, considering that as a result of the said exchange, SMC and TCCEC will gain control of the transferee corporation. No gift tax is payable under the abovementioned transaction as SMC and TCCEC will receive in exchange for the assets transferred by them shares of stock of equivalent value. It should be emphasized, however, that Section 35(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 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. (Section 35(c)(5)(b) of the Tax Code.) If pursuant to the exchange transaction, and as a part of the consideration, the transferee corporation assumes the liability of the transferors or acquires from the transferors property subject to a liability, such assumption or acquisition shall not be treated as money and or other property, and shall not prevent the exchange from being tax free. (See Sec. 35(c) (4)(a) of the Tax Code as amended by P.D. No. 1773.) If the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset as the case may be (Sec. 35(c)(4)(b) of the Tax Code as amended by P.D. No. 1773.) The cost basis or value of the stocks received by the transferor of property subject to a liability, where the liability transferred and assumed by transferee corporation does not exceed the transferor's basis or the original and/or acquisition cost of the property transferred, shall be the difference between the liability or liabilities assumed by the transferee corporation and the acquisition or original cost of the property transferred. On the other hand, where the total liabilities to be assumed by the transferee corporation exceed the original or acquisition cost of the property transferred, the excess shall be recognized as gain to the transferor and the value or cost basis of the stocks to the transferor shall be the difference between the original cost of the property transferred subject to a liability (plus the gain recognized to the transferor) and the liability or liabilities assumed by the transferee corporation. In this connection, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gain provided for in Section 35(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 property transferred, or of their respective interest in such property, together with a statement of the 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 property received from the transferors; (2) A statement of the original acquisition cost or other basis thereof in the hands of the transferors and the adjusted cost basis 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 stock and number of shares issued to the transferors in the exchange; and cdt (c) The fair market value of the capital stock as of the date of exchange which was 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. All said requirements should be complied with; otherwise, the exchange shall not be considered an exempt transaction within the purview of Section 35(c) of the Tax Code. cdt Very truly yours, RUBEN B. ANCHETA Acting Commissioner