BIR Ruling No. 387-13

October 22, 2013 BIR RULING NO. 387-13 Sec. 40 (C) (2) and (6) (c), 1997 NIRC Mr. Antonio Ma. P. Soriano 3780 Cenca St., Palanan, Makati City Sir : This refers to your letters dated February 28, 2012 and June 27, 2012 requesting for revalidation of BIR Certification-Ruling SN-094-2004 dated May 18, 2004. Documents submitted show that the afore-stated ruling pertains to the tax-deferred transfer of properties by Antonio Ma. P. Soriano covering Transfer Certificates of Title (TCT) Nos. 237745 and 237746 in exchange for 2,500 shares of Anacom Management Corporation (Anacom for brevity) under Section 40 (C) (2) and (6) (c) of the National Internal Revenue Code (NIRC) of 1997, as amended. It is represented that Antonio Ma. P. Soriano (TIN 106-214-449) is the registered owner of the following properties: TCT Location Land Area Zonal Value Historical No. (in sq.m.) (in Pesos) Cost (in Pesos) 266405 F. Agoncillo St. 55 880,000.00 137,500.00 (formerly 237745) Ermita, Manila 264471 1 F. Agoncillo St. 144 2,304,000.00 360,000.00 (formerly 237746) Ermita, Manila 3,184,000.00 497,500.00 ========== ========= On the other hand, Anacom (TIN 005-031-413-000) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. A1997-20618 dated November 18, 1997; that it has an authorized capital stock of Ten Million Pesos (P10,000,000.00) divided into Ten Thousand (10,000) shares with a par value of One Thousand Pesos (P1,000.00) per share; that the incorporators of the corporation with their corresponding shares subscribed and paid-up are as follows: ICTHDE Name No. of Amount Amount Shares Subscribed Paid-up Arthur N. Aguilar 1,500 P1,500,000.00 P376,250.00 Antonio Ma. P. Soriano 625 625,000.00 250,000.00 Jaime Manuel F. Armonio 125 125,000.00 31,250.00 Alvin N. Aguilar 125 125,000.00 31,250.00 Andres D. Bautista 125 125,000.00 31,250.00 Total 2,500 P2,500,000.00 P720,000.00 ===== =========== ========== that Antonio Ma. P. Soriano (Assignor) on May 12, 2004 executed a Deed of Transfer with Subscription Agreement in favor of Anacom whereby he transferred to the latter the afore-stated properties in exchange for 2,500 shares of stock of Anacom, broken down as follows: TCT No. Allocation of Shares 266405 (formerly 237745) 691 264471 (formerly 237746) 1,809 2 Total 2,500 ===== and that as a result of the transfer, the above-named assignor gains control of Anacom by owning 62.5% of the total voting stocks of the said corporation as follows: Name No. of Amount Amount % of Shares Subscribed Paid-up Ownership Arthur N. Aguilar 1,500 P1,500,000.00 P376,250.00 30.0 Antonio Ma. P. Soriano 3,125 3,125,000.00 2,750,000.00 62.5 Jaime Manuel F. Armonio 125 125,000.00 31,250.00 2.5 Alvin N. Aguilar 125 125,000.00 31,250.00 2.5 Andres D. Bautista 125 125,000.00 31,250.00 2.5 Total 5,000 P5,000,000.00 P3,220,000.00 100% ===== =========== =========== ===== On May 18, 2004 this Office issued BIR Certification-Ruling SN-094-2004, pertinent portion of which states that: "THIS IS TO CERTIFY that, on the basis of the representations and documents submitted, particularly the Application and Joint Certification executed on May 14, 2004 and submitted to the Bureau on May 14, 2004 , original copy of which is attached hereto and made an integral part hereof, the transfer of the properties appearing in Annex "1" hereof, by and between: DEICHc Name of Transferor/s TIN Address Type of Entity Antonio P. Soriano 106-214-449 3780 Cuenca, Makati City Individual - and - Name of Transferee TIN Address Type of Entity Anacom Management 005-031-413-000 301 Asian Mansion, Domestic Corporation Dela Rosa St., Legaspi Corporation Village, Makati City is not subject to income tax/capital gains tax/expanded withholding tax/donor's tax/and value-added tax. The transaction is, however, subject to documentary stamp tax as follows: Transaction Tax Base Tax Amount (Amount in Pesos) Rate Due Transfer of real property P3,184,000.00 P15.00 on each P1,000.00, Exempt under or fractional part thereof RA No. 9243 in excess of P1,000.00 which took effect on March 20, 2004 Original issuance of P2,500,000.00 P1.00 on each P200.00 or P12,500.00 shares or interest of fractional part thereof. transferee corporation (new rate under R.A. 9243) Even if the assignor had already partially implemented the above-stated Certification-Ruling when TCT No. 264472 (formerly 264471) was issued in the name of Anacom and the appropriate stock certificate was likewise released in the name of Antonio Ma. P. Soriano corresponding to his 1,809 shares subscription. Still Certification-Ruling SN-094-2004 had already lose its validity relative to TCT No. 266405 (formerly 237745) when the herein parties did not comply with the 90-days annotation period as required by Section 7 of Revenue Regulations No. 18-2001. It is of no moment that the parties waited for a Court Order 3 which came two (2) years after and way past the said obligatory period. In support of your request, you then submitted to this Office the following documents: 1) Duly notarized Application and Joint Certification (BIR Form 1927) dated May 14, 2004; 2) Proof of payment of the processing and certification fee dated May 13, 2004; 3) Original copy of the Deed of Transfer with Subscription Agreement dated May 12, 2004; 4) Copy of the Articles of Incorporation and By-Laws of Anacom; 5) Certified true copy (LRA CCV Form) of TCT No. 266405; 6) Certified true copy of the Tax Declaration No. C-073-00138 and photocopy of C-073-04-00626 (for the old TCT No. 237745); 7) Photocopy of Certificate of Payment dated May 4, 2004 issued by the City Treasurer's Office of Manila, Real Estate Division stating that there have no Real Estate Tax Delinquencies as of May 4, 2004; 8) Certified true copy of the zonal valuation certificate attested to by the OIC-Chief of the Asset Valuation Division, BIR; 9) Photocopy of the Deed of Absolute Sale of the subject property; 10) Original copy of the Corporate Secretary's Certificate stating that Lourdes F. Quimson is the designated duly authorized signatory to the Deed of Transfer with Subscription Agreement dated May 12, 2004; 11) Certified true copy of the General Information Sheet (GIS) of Anacom; and 12) and other pertinent documents. In reply thereto, please be informed that pursuant to Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended, 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 classes of stocks entitled to vote. Control is determined by the amount of stocks received i.e. , total subscribed by the transferor. 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. aDSAEI Accordingly, no gain or loss shall be recognized on the transfer by Antonio Ma. P. Soriano of his real property covered by TCT No. 266405 in exchange for 691 shares of stock of the transferee corporation, Anacom, considering that as a consequence of the exchange, he gained control of the transferee corporation by owning 62.5% of its total voting stocks. 4 It should be emphasized, however, that Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended, merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the property or of the stocks involved in the exchange, the original or historical cost of the property or stocks is considered. Thus, if Antonio Ma. P. Soriano will later sell or exchange the shares of stock he acquired in the exchange, he shall be subject to income tax on the gains he 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 property exchanged therefor; and that the cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferor. [Sec. 40 (C) (5) (a) and (b) of the 1997 Tax Code] Moreover, 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 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended, they should comply with the requirements hereunder mentioned: A. The transferor must file with his 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 property they transferred, or of their interest in such property, with a statement of the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer; 2. The kinds 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 the property received from the transferor; 2. A statement of the original acquisition cost or other basis of the property in the hands of the transferor and the adjusted cost basis thereof at the time of the transfer; and ICTDEa 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, the parties, shall enclose with their respective income tax returns for the taxable year in which the tax-free exchange occurred a copy of the request for ruling filed with, and the corresponding ruling issued by the Bureau of Internal Revenue, both duly stamped received by the appropriate office of the Bureau of Internal Revenue. Such persons shall include as a note to their respective audited financial statements for the taxable year in which the exchange occurred a statement to the effect that they hold such assets/shares acquired in a tax-free exchange and the year in which such exchange occurred, and in the taxable years until the subject property are subsequently transferred to another transferee. The parties shall, pursuant to Section 58 (E) of the Tax Code of 1997, as amended, also cause the Corporate Secretary to annotate at the back of the Certificates of Stock, the date the Deed of Assignment 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; provided however, that any violation by the Register of Deeds of this condition shall be penalized under Section 269 of the same Code. It is further required that a TCT/CCT/Share of Stock that bears the annotation of substituted bases of the real property/shares of stock transferred/received in connection with this transaction, as duly certified by the RD/Corporate Secretary, should be submitted to the Law Division, Bureau of Internal Revenue, 7/F National Office Building, Diliman, Quezon City, within ninety (90) days from the date of the receipt of this Certification, by any of the parties to the exchange transaction. Otherwise, this ruling shall be void and without effect, and the Chief, Law Division shall refer the docket of the case to the Prosecution Division for appropriate action. Pursuant to Section 199 (m) of the Tax Code of 1997, as amended by Republic Act (RA) No. 9243 which took effect on March 20, 2004, transfer of property pursuant to Section 40 (C) (2) of the 1997 Tax Code, as amended, is now exempt from the payment of documentary stamp tax (DST). Accordingly, the transfer by Antonio Ma. P. Soriano of his real property to Anacom is not subject to DST under Section 196 of the Tax Code of 1997, as amended. However, the shares to be issued by Anacom are original issues subject to the documentary stamp tax imposed by Section 174 of the Tax Code of 1997, as amended, which shall attach upon acceptance by the corporation of the stockholder's subscription regardless of the actual delivery of the certificates of stock. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained 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 as null and void. AECDHS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Now in the name of Anacom Management Corporation under TCT No. 264472. 2. Now in the name Antonio P. Soriano under Stock Certificate No. 017. 3. Section 50 of Presidential Decree No. 1529 requires a prior Court Approval before the transfer, disposition and closure of an alley lot. 4. Together with the transaction involving TCT No. 264471 (formerly 237746).