Tax Consequence of the Transfer of Assets, Liabilities, and Business by a Limited Partnership in Exchange for Shares of Stock of a New Corporation

November 16, 1981 BIR RULING NO. 229-81 035-c 075-00 229-81 Messrs. Siguion Reyna, Montecillo & Ongsiako A. Soriano Bldg., Ayala Avenue Makati, Metro Manila Attention: Atty . M . G . Montecillo Gentlemen : This refers to your letter dated October 2, 1981 requesting a ruling on behalf of your client, Roxas y Compania, Limitada (hereinafter referred to as Roxas) on the tax consequence of the transfer of all its assets, liabilities, and business as a going concern in exchange for a fully paid and non-assessable shares of stock of a new corporation to be organized and created under the laws of the Philippines. It is represented that Roxas is a limited partnership, duly organized and existing under and by virtue of the laws of the Philippines; that Roxas is engaged in the business of management services, stock investments in various corporations, various agricultural ventures such as sugar, coconut, copra, coffee, other crops, swine, general merchant, real estate owner-lessor and importer-exporter; that at present, Roxas has a capital of P3,000,000.00 owned by the following partners in the amounts and proportions set opposite their respective names: cdti Partnership Name of Partners Amounts Interest Antonio Roxas Gargollo P30,000.00 1.00000000% Eduardo Roxas Gargollo 30,000.00 1.00000000% Antonio Jose Roxas Mendezona 651,666.50 21.72221667% Maria del Carmen Roxas Mendezona de Elizalde 651,666.50 21.72221667% Pilar Roxas Olgado 260,666.60 8.688886668% Beatriz Roxas Olgado de Bravo 260,666.60 8.688886668% Eduardo Jose Roxas Olgado 260,666.60 8.688886668% Pedro Roxas Olgado 260,666.60 8.688886668% Marta Roxas Olgado 260,666.60 8.688886668% Maximo Fernandez Roxas 83,333.50 2.77778333% Maria del Carmen Fernandez Roxas 83,333.50 2.77778333% Ricardo Fernandez Roxas 83,333.50 2.77778333% Eduardo Fernandez Roxas 83,333.50 2.77778333% that the three above-named partners are general partners and all the rest of the partners are limited partners; that it is proposed that Roxas be converted from an existing domestic limited partnership into a domestic corporation; that Roxas shall transfer all its assets, liabilities, and business as a going concern, in favor of a new corporation to be organized and created under the laws of the Philippines; that in consideration of the transfer by Roxas of all its assets, liabilities and business as a going concern to the new corporation, the new corporation shall issue and deliver fully-paid and non-assessable shares of stock having an aggregate par value of P20,000,000.00; that Roxas is expected to have a net book value of at least P20,000,000.00 at the time of the transfer; that the transfer of the assets, liabilities and business of Roxas to the new corporation shall be made at the net book value of Roxas; that the shares to be issued by the new corporation shall be issued and delivered to the partners in Roxas in exactly the same proportion which such partners have in Roxas; and that the new corporation shall be owned by the same partners owning Roxas in exactly the same proportionate interest which said partners have in Roxas. 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 Decrees Nos. 1765 and 1775 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 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 Roxas and its partners and the transferee corporation on the transfer by Roxas of all its assets, liabilities, and business as a going concern in exchange for fully-paid and non-assessable shares of stock of the transferee corporation considering that as a result of the said exchange, not more than five (5) of the transferors-partners will gain control of the transferee corporation. The abovementioned transactions shall not be subject to the gift tax as there is no intention to donate on the part of any of the parties. 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, of the transferors later sell or exchange the shares of stock acquired by them in 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. cdt (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; (3) Information with respect to the capital stock of the corporation, including: (a) The total issued and outstanding capital stock 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 (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 in order to facilitate the determination of gain or loss from a subsequent disposition of stocks/properties received in the exchange. cdti Very truly yours, RUBEN B. ANCHETA Acting Commissioner