Tax Consequence of the Transfer of Stockholdings

July 18, 1988 BIR RULING NO. 330-88 24 (c) (2) (c) 098-87 330-88 Gentlemen : This refers to your letter dated May 5, 1988 requesting a ruling on the tax consequence of the contemplated transfer by your clients, CADECO-Agro-Development Phils., Inc. (CADECO) and the Lorenzo Family of their stockholdings in Sterling Tobacco Corporation (Sterling) to Macondray Holdings Corporation (Macondray) solely in exchange for its shares of stock. It is represented that Macondray, a Philippine Company, has subscribed and outstanding shares of 22,500,000 with a par value of P1.00 per share broken down as follows: cdtech NAME NO. OF SHARES Luis F. Lorenzo 1,875,000 Luis P. Lorenzo Jr. 625,000 Alicia P. Lorenzo 625,000 Regina L. Davila 625,000 Marco A.P. Lorenzo 625,000 Lourdes B.P. Lorenzo 625,000 Jose Paulo P. Lorenzo 625,000 Martin I.P. Lorenzo 625,000 Tomas A.P. Lorenzo 625,000 Luisa N.P. Lorenzo 625,000 CADECO Agro-Development Phils., Inc. 4,999,997 Jesus N. Manalastas 3,000,001 Victoria Z. Egan 2,300,001 Edmundo T. Lim 4,700,001 22,500,000 ========= that CADECO and the ten (10) individuals comprising the Lorenzo Family, who are all stockholders of record in Macondray, own the following fully paid shares of stock with a par value of P100.00 per share, in Sterling, another Philippine company: NAME NO. OF SHARES Luis F. Lorenzo 3,000 Luis P. Lorenzo Jr. 103,000 Alicia P. Lorenzo 3,000 Regina L. Davila 3,000 Marco A.P. Lorenzo 3,000 Lourdes B.P. Lorenzo 3,000 Jose Paulo P. Lorenzo 3,000 Martin I.P. Lorenzo 3,000 Tomas A.P. Lorenzo 3,000 Luisa M.P. Lorenzo 3,000 CADECO Agro-Development Phils., Inc. 70,000 200,000 ======= that the Lorenzo Family and CADECO will transfer all of their 200,000 Sterling shares, with an aggregate par value and acquisition cost of P20 Million, in favor of Macondray in exchange for 36,000.00 fully paid shares, with an aggregate par value of P36 Million in Macondray; and that after such transfer, the stockholdings of the Lorenzo family and CADECO in Macondray shall be as follows: Additional Shareholdings Beginning in Exchange for Resulting Name Stock Sterling Stock holdings holdings Shares Luis F. Lorenzo 1,875,000 540,000 2,415,000 Luis P. Lorenzo, Jr. 625,000 18,540,000 19,165,000 Alicia P. Lorenzo 625,000 540,000 1,165,000 Regina L. Davila 625,000 540,000 1,165,000 Marco A.P. Lorenzo 625,000 540,000 1,165,000 Lourdes P. Lorenzo 625,000 540,000 1,165,000 Jose Paulo P. Lorenzo 625,000 540,000 1,165,000 Martin L.P. Lorenzo 625,000 540,000 1,165,000 Tomas A.P. Lorenzo 625,000 540,000 1,165,000 Luisa M.P. Lorenzo 625,000 540,000 1,165,000 CADECO Agro- Development Phils., Inc. 4,999,997 12,600,000 17,599,997 Jesus M. Manalastas 3,000,001 3,000,001 Victoria Z. Egan 2,300,001 2,300,001 Edmundo T. Lim 4,700,001 4,700,001 22,500,000 36,000,000 58,500,000 ========= ========= ======== and that as a result of the contemplated transfer of the Sterling shares in exchange for Macondray shares, three (3) stockholders, namely: CADECO, Luis F. Lorenzo, and Luis P. Lorenzo, Jr. will own 66.9% of the total voting in Macondray. 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 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 percent (51%) of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stock 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 stock in the same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized to each of the eleven (11) transferors, Luis F. Lorenzo, Luis P. Lorenzo, Jr., CADECO, Alicia P. Lorenzo, Regina L. Davila, Marco A.P. Lorenzo, Lourdes B.P. Lorenzo, Jose Paulo P. Lorenzo, Martin I.P. Lorenzo, Tomas A.P. Lorenzo and Luis M. Lorenzo and the transferee corporation Macondray considering that after the exchange and as a result of the said exchange, three (3) of the transferors namely: CADECO Agro-Development Phils., Inc., Messrs. Luis F. Lorenzo and Luis P. Lorenzo, Jr., or not more than five (5) of 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 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 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 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 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 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 exchange was consummated the following: (1) A complete description of all properties received from the transferors; (2) A statement of the original acquisition cost or other basis of the properties in the hands of the transferors 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 stocks; b) The classes of stock and number of shares issued to the transferors in the exchange; and c) The fair market value as of the date of the exchange of the capital stock 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. Moreover, the certificates of stocks issued by Macondray Holdings Corporation are, in all probability, original issues, which are subject to the documentary stamp tax imposed by Section 188 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 stamp 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 of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner