Transfer of Property to a Corporation in Exchange for Stock

1992 BIR RULING NO. 366-92 34 (c) (2) (c) 241-91 366-92 Bautista Picazo Buyco Tan & Fider 8th Floor, Singapore Airlines Building 138 H.V. dela Costa Street, Salcedo Village Makati, Metro Manila Attention: Atty . E . Gemma M . Santos Gentlemen : This refers to your letter dated October 5, 1992 in behalf of your client, PEREGRINE CAPITAL PHILIPPINES, INC. (P. Capital Phils.) requesting for a ruling that the proposed transfer to P. Capital Phils. of shares in PEREGRINE SECURITIES PHILIPPINES INC. (P. Securities Phils.) by the following stockholders: ALAKOR CORPORATION, PEREGRINE SECURITIES LTD. and PEREGRINE PHILIPPINES HOLDINGS, INC. (Transferors) in exchange for shares in P. Capital Phils. qualifies as a tax-free exchange of property in accordance with Revenue Memorandum Order No. 26-92, and falling under Section 34 (c) (2) (c) of the Tax Code, as amended. cdtech It is represented that P. Capital Phils. is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Fifty Million Pesos (P50,000,000.00) divided into Five Hundred Thousand (500,000) shares with a par value of One Hundred Pesos (P100.00) per share, of which Twenty Thousand (20,000) shares were subscribed and paid as follows: Name No. of Amount Amount Paid Shares Subscribed Peregrine Capital Inter- national, Ltd. 79,999 P7,999,900.00 P7,999,900.00 Peregrine Philippines Holdings, Inc. 21,997 2,999,700.00 2,199,700.00 Alakor Corporation 97,999 9,799,900.00 9,799,900.00 Kennedy B. Sarmiento 1 100.00 100.00 Ramon B. Arnaiz 1 100.00 100.00 Leo B. Alejandrino 1 100.00 100.00 Lorenzo B. Lichauco 1 100.00 100.00 Natividad F. Khan 1 100.00 100.00 Judd Kinna 1 100.00 100.00 Total 200,000 P20,000,000.00 P20,000,000.00 ======== =========== =========== that the Transferors are the registered owners of a total of 172,341 fully paid shares of the capital stock of P. Securities Phils. broken down as follows: No. of Shares Subscribed Par Book and Paid-Up Value Value Alakor Corporation 69,300 P6,930,300.00 P9,621,612.00 Peregrine Securities Ltd. 20,196 2,081,600.00 11,220,493.00 Peregrine Philippines Holdings, Inc. 22,225 2,222,500.00 3,035,719.00 172,341 P7,234,100.00 P23,927,824.00 ====== ========== =========== that P. Capital Phils. is increasing its authorized capital stock from P50 Million to P150 Million; that out of said increase, the Transferors shall subscribe to 229,278 shares of stock at a price of P100.00 per share, and pay said subscription through the assignment to P. Capital Phils. of all of their 172,241 shares in P. Securities Phils.; that the breakdown of the said subscription by the Transferors to the increase in the authorized capital stock of P. Capital Phils. to be paid for by their shares in P. Securities Phils. is as follows: No. of Shares Subscribed Out of the Increase in Fully paid Thru Transfer of Shares Par Value Peregrine Phils. Holdings, Inc. 30,857 P3,085,700.00 Alakor Corporation 96,216 9,621,600.00 Peregrine Securities 112,205 11,220,500.00 239,278 P23,927,800.00 ====== =========== that Peregrine Philippine Holdings, Inc. shall automatically subscribe to another 10,722 shares and pay for the same in cash; that after the increase in its authorized capital stock, the resulting outstanding capital stock of P. Capital Phils. shall be as follows: No. of Shares Subscribed & Par % of Fully Paid-up Value Ownership Peregrine Capital International, Inc. 79,998 P7,999,800.00 18% Peregrine Philippines Holdings, Inc. 63,576 6,357,600.00 14% Alakor Corporation 194,215 19,421,500.00 43% Peregrine Securities Ltd. 112,206 11,220,600.00 Ramon B. Arnaiz 1 100.00 Leonardo P. Alejandrino 1 100.00 Lorenzo B. Lichauco 1 100.00 Antonio A. Ficazo 1 100.00 Judd Kinne 1 100.00 450,000 P45,000,000.00 100% ====== ========== ===== that as a result of their subscription to the increase in the authorized capital stock of P. Capital Phils., to be paid through the transfer of their shares in P. Securities Phils. to P. Capital Phils., the Transferors shall gain further control of P. Capital Phils. with the total percentage of their shareholdings therein increasing from 60% to 80% and, that in support of your request, you submitted to this Office photocopies of the following documents: cdll 1. Assignment Agreement; 2. Articles of Incorporation of P. Capital Phils. and P. Securities Phils., with the corresponding SEC Certificates of Registration; 3. Amended Articles of Incorporation of P. Capital Phils. reflecting the increase in its authorized capital stock, with the corresponding Directors' Certificate of Amendment of Articles of Incorporation; 4. Certification of the Transferors as to the original or historical cost of acquisition/adjusted cost basis of the P. Securities Phils. shares to be transferred to P. Capital Phils., and 5. Certification by the Corporate Secretary of P. Capital Phils. of its present as well as resulting capitalization after the increase of its capital stock, and the respective resulting percentages of shareholdings in P. Capital Phils. of the Transferors after the exchange transaction. 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 51% of the total voting power of all stocks entitled to vote. Control is determined by the amount of stock received, i.e., 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 stock in the same transaction may be counted up to maximum of five. Accordingly, no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by P. Securities Phils. Ltd. in exchange for shares of stock of the transferee corporation, P. Capital Phils. considering that after the exchange of properties and as a result of said exchange, P. Securities Phils. Ltd. gained control of P. Capital Phils. 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, four 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 stock 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 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 transferor of the properties exchanged therefor; and that the cost basis to the transferor 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). 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 transferors must file with their 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 their interest in such properties, with a statement of the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer; llcd 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 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 exchange; 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 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. 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 shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange. Finally, the certificate of stocks to be issued by the P. Capital Phils., which in all probability are original issues, are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. 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. prcd Very truly yours, JOSE U. ONG Commissioner of Internal Revenue