Tax Consequence of the Transfer of Shares of a Domestic Corporation Solely in Exchange for Shares of Stock

November 12, 1991 BIR RULING NO. 241-91 34 (c) (2) (c) 96-91 241-91 Gentlemen : This refers to your letters dated February 7 and May 28, 1991 requesting a ruling on the tax consequence of the contemplated transfer of shares of Great Pacific Life Assurance Corporation (GPL) in favor of GPL Holdings, Inc. solely in exchange for its shares of stock. cdta It is represented that GPL is a domestic corporation engaged in the business of life insurance with an authorized capital stock of P95,000,000.00 divided into 9,500,000 shares with a par value of P10.00 per share of which 3,014,805 shares are issued and outstanding as of December 31, 1990; that GPL was then one of the leading life insurance companies in the industry; that at present, it ranks only sixth in the life insurance industry in terms of premium; that the management and stockholders of GPL deeply concerned that such trend will continue in the years to come unless something is done about it, are contemplating of consolidating the ownership of GPL shares in one corporation by organizing a holding company to be known as GPL Holdings, Inc. Which is in the process of incorporation with a proposed authorized capital stock of P952,193,520.00, divided into 95,219,352 shares with a par value of P10.00 per share of which P238,048,330.00 shall be subscribed and fully paid, and in which all of the 3,014,805 GPL shares shall be transferred solely in exchange for the latter's 23,804,833 stocks on the basis of the book value of GPL shares as of December 31, 1990 at P73.9596 per share as against P10.00 per share par value of the holding company; that the contemplated transfer will result to more than 65% of GPL Holdings, Inc. stocks owned by not more than four (4) persons who are controlling stockholders of GPL as follows: Names Percentage of Interest in GPL 1. Pan Malayan Management & Investment Corporation 53.0670% 2. GDSK Development Corporation 5.2900% 3. Estate of John Sycip 3.9103% 4. RP Land Development Corporation 3.4151% 65.6824% ======== and that the business purpose for the organization of the said holding company is to give management better flexibility to reorganize GPL and hopefully lead it to become one of the leaders in the industry. In reply thereto, 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 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 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 percent (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., subscribed and paid-up, 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, no gain or loss shall be recognized both to the transferor and the transferee corporation on the proposed transfer by GPL of its shares of stock in exchange for the shares of stock of the presently being organized holding company, GPL Holding, Inc., considering that as a result of the proposed exchange, the transferors will gain control of the transferee corporation. 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, 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 gain 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 stocks shall be the same as it would be in the hands of the transferors. [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 proposed exchange can avail of the non-recognition of gain or loss 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 proposed 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 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 proposed 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 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 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 stock/properties received in the exchange. The parties shall also cause to be annotated at the back of the Certificate of Stocks, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock involved, as well as the fact that no gain or loss was recognized as a result of such exchange. Moreover, the certificate of stocks to be issued by GPL Holdings, Inc. are, in all probability original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. cdtech Furthermore, under Section 248 (d) in relation to Section 173 of the Tax Code, as amended by Presidential Decree No. 1994 in case of failure to affix the proper documentary stamps 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 (25%) of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. 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. Very truly yours, (SGD.) JOSE U. ONG Commissioner