Proposed Transfers of Several Cargo Vessels is Exempt from Capital Gains Tax

December 4, 1991 BIR RULING NO. 260-91 34 (c) (2) (c) 160-90 260-91 Gentlemen : This refers to your letter dated July 8, 1991 stating that your client, Loadstar International Shipping Co., Inc. (LISI), a domestic corporation organized and existing under Philippine laws with principal office at 1294 Romualdez Street, Paco, Manila, is engaged in the shipping business, both domestic and coastwise; that as such, it is the owner of several cargo vessels among which are MV Barcat and MV Bobcat, with the following descriptions: 1) MV Bearcat Gross Tonnage 3,225.86 Net Tonnage 2,057.59 Dead Weight Tonnage 5,807.60 Appraised value P51,000,000.00 2) MV Bobcat Gross Tonnage 3,353.09 Net Tonnage 2,165.12 Dead Weight Tonnage 6,081.00 Appraised value P40,000,000.00 that LISI tends to transfer and assign ownership of MV Bearcat in favor of Loadstar Marine Corporation (LMC), likewise a domestic shipping corporation duly organized and existing under Philippine laws, in exchange for the latter's shares of stock equivalent to P51,000,000.00; that while MV Bobcat will be transferred/conveyed to Loadstar Maritime, Co., Inc. (LMCI), also a domestic shipping corporation, in exchange for LMCI shares worth P40,000,000.00; and that as a consequence of the foregoing plans, LISI will be the owner of P51 million worth of shares of LMC, which will be 97.6% of the total outstanding capital stock of LMC, while in LMCI, LISI will be the owner of P40,000,000.00 worth of LMCI shares equivalent to 88.89% of LMCI's entire outstanding shares. Based on the foregoing representations, you now request a ruling confirming that the proposed transfers of MV Bearcat and MV Bobcat to LMC and LMCI, respectively, by LISI are both exempt from the capital gains tax pursuant to Section 34 (c) (2) (c) of the Tax Code. In reply, please be informed 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 stocks in such corporation of which as a result of such exchange, said person, alone or together with other, 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 to the effect that no gain or loss shall be recognized, both to the transferor and the transferee corporations on the proposed transfer by your clients, LISI, of its vessels, MV Bearcat and MV Bobcat, in exchange for shares of stock of LMC and LMCI respectively, is hereby confirmed, considering that after the proposed exchange, the transferor will gain control of the transferee corporations. 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), Tax Code, as amended by Presidential Decree No. 1773]. aisadc In this connection, you are further advised that in order that the parties to the proposed 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 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 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 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 corporations must file with their respective income tax returns 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 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 tax payers 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 Certificate of Titles, or in the instant case, the Certificates of Registration of the aforenamed vessels and at the back of the Certificate of Stocks, the date the deed of exchange was executed, the original acquisition cost or historical cost of the properties or shares of stock involved, as well as, the book value (undepreciated cost) of the improvements and the fact that no gain or loss was recognized as a result of such exchange. Moreover, the Certificates of Stocks to be issued by LMCI and LMC are, in all probability original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. Furthermore, under Section 248 (d) in relation to Section 173 of the Tax Code as amended by Executive Order No. 273, 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. Finally, should the aforementioned proposed transaction materialize and after payment of the corresponding documentary stamp tax, this Office shall interpose no objection to the registration of the aforesaid vessels with the proper government agency concerned in the name of the transferee corporations, LISI and LMC. This ruling is being issued on the basis of the foregoing facts as represented. However, is 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. cdta Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner (Officer-in-Charge)