Transfer of Properties for Stocks Gives Rise to Neither Gain nor Loss

May 18, 1993 BIR RULING NO. 224-93 TRANSFER OF PROPERTIES FOR STOCKS GIVES RISE TO NEITHER GAIN NOR LOSS 34 (c) (2) (C) 216-91 224-93 Sycip, Salazar, Fernandez & Gatmaitan 105 Paseo de Roxas Makati, Metro Manila Attention: Atty . Ma . Melina B . Saldajeno This refers to your letter dated September 9, 1992, requesting for a ruling with respect to the transfer by your clients, The Philippine American General Insurance Company, Inc. (PAG) of substantially all of its assets if favor of PhilAm Insurance Company, Inc. (PAI) in exchange for its shares of stock in accordance with Revenue Memorandum Circular No. 26-92, falls under Section 34(c) (2) (c) of the Tax Code, as amended. It represented that PAI is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that it has an authorized capital stock of P10,000,000.00, which was increased to P50,000,000.00, divided into 500,000 shares with a par value of P100.00 per share, which were subscribed, as follows: Stockholder No. of Shares Amount Subscribed Phil. American General Ins. Co., Inc. (PAG) 99,919 P9,991,900.00 Miguel Campos 18 1,800.00 Rodrigo de los Reyes 18 1,800.00 Ernest E. Stempel 18 1,800.00 Houghton Freeman 18 1,800.00 Ernesto S. Valencia 2 200.00 Ronald J. Anderson 2 200.00 Eligia G. Fernando 1 100.00 Leslie J. Mouat 1 100.00 Cesar L. Garcia 1 100.00 Renato A. Vergel de Dios 1 100.00 James L. Williams 1 100.00 Total 100,000 P10,000,000.00 ====== =========== that PAG, a domestic corporation duly registered with the Securities and Exchange Commission is the absolute owner of assets consisting of real properties (TCT Nos. 42884, 32849, 22454 & Condominium Cert. of Title Nos. S-583 and 3070), shares of stock, bonds, government securities, receivables and other properties (collectively, the "Asset"), listed in Annex "A"; that PAG has expressed willingness to acquire additional shares of stock of PAI and has proposed to assign the Assets and the Liabilities with reasonable value of P521,056,619.00 (Annex "A"); that on May 5, 1992, PAG executed a Deed of Assignment of all of the abovementioned Assets and Liabilities with reasonable value of P521,056,619.00 in favor of PAI in exchange for 400,000 shares of stock with an aggregate value of P40,000,000.00; that as a result of the above transaction, PAG gained control of the PAI by owning at least 51% of the total voting stock of the said corporation as follows: Stockholder No. of Shares Amount Subscribed Phil. American General Ins. Co., Inc. (PAG) 499,919 P49,991,900.00 Miguel Campos 18 1,800.00 Rodrigo de los Reyes 18 1,800.00 Ernest E. Stempel 18 1,800.00 Houghton Freeman 18 1,800.00 Ernesto S. Valencia 2 200.00 Ronald J. Anderson 2 200.00 Eligia G. Fernando 1 100.00 Leslie J. Mouat 1 100.00 Cesar L. Garcia 1 100.00 Renato A. Vergel de Dios 1 100.00 Manuel S. Quijano 1 100.00 Total 500,000 P50,000,000.00 ====== =========== that in support of your request you submitted to this Office photocopies of the following documents: (a) deed of assignment; (b) articles of incorporation duly registered with SEC of the transferee and transferor corporations; (c) copies of the transfer certificates of title and the corresponding tax declarations; (d) certification as to the original or historical cost of acquisition/adjusted cost basis of the properties transferred; (e) certification by the corporate secretary of the transferee corporation of its authorized capitalization and par value of the shares of stock; (f) certification of percentage of ownership of the shares of stock by the transferor as a result of the transaction; and (g) other pertinent documents. In connection therewith, you now request for confirmation of your following opinions, that: 1. No gain or loss shall be recognized by PAG or PAI on the transfer of its assets and liabilities to PAI pursuant to Section 34(c) (2) of the Tax Code, considering that as a result of the exchange PAG maintains its control of PAI; 2. The transfer by PAG of its assets will not be considered as a transfer of property for insufficient consideration subject to gift tax since there is no intention to donate, and the transaction is effected solely for business reasons; 3. The transfer of tangible assets, including real property, by PAG to PAI, is not subject to value added tax (VAT) as the insurance business is an activity exempt from VAT; 4. Documentary stamp tax is due on the transfer of real properties by PAG which shall be based on the book value of the PAI shares to be received in the exchange, based on the latest audited financial statements of PAI; and 5. The certificates of stock which shall be originally issued by PAI to PAG shall be subject to documentary stamp tax under Section 175 of the Tax Code. In reply thereto, I have 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 P.D. 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 transfer by PAG of its assets and liabilities in exchange for shares of stock of the transferee corporation, PAI, considering that as a consequence of the said exchange, the transferor gained further 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 transferor later sells or exchanges the shares of stock acquired by it in the exchange, it 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 transferor 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 transferor (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 transferor must file with its 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 its 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 transferor; 2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferor 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 the number of shares issued to the transferor in the exchange; and c. The fair market value as of the date of the exchange of the capital stock issued to the transferor. 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. The parties shall also cause to be annotated on the Transfer Certificates of the Title and at the back of the Certificates of Stock, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange. Moreover, pursuant to Section 196 of the Tax Code, as amended, a conveyance or deed whereby land is assigned or transferred to the purchaser, is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for such realty. A stock in a corporation is a valuable consideration for transfer or real property (Section 177, Documentary Stamp Tax Regulations). Accordingly, if a parcel of land is exchanged with stocks in a corporation, as in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the Deed of Assignment executed to effect the aforesaid transfer (BIR Ruling No. 245-00-000-00-109-82, dated April 06, 1982). The value shall be the fair market value which shall not be less than the par value of stocks. Furthermore, your opinion to the effect, viz: (1) That transfer by PAG of its assets will not be considered as a transfer of property for insufficient consideration subject to gift tax since there is no intention to donate, and the transaction is effected solely for business reasons; (2) The transfer of tangible assets, including real property, by PAG to PAI, is not subject to value added tax (VAT) as the insurance business is an activity exempt from VAT; and (3) That documentary stamp tax is due on the transfer of real properties by PAG which shall be based on the book value of the PAI shares to be received in the exchange, based on the latest audited financial statements of PAI, are hereby confirmed. The certificate of stocks to be issued by PAI are, in all probability original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. After payment of the corresponding documentary stamp tax, the real properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, PAI. 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. aisadc VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue