No Gain or Loss is Recognized on Transfer of Shareholdings for Shares of Stock

October 29, 1993 BIR RULING NO. 425-93 NO GAIN OR LOSS IS RECOGNIZED ON TRANSFER OF SHAREHOLDINGS FOR SHARES OF STOCK 34 (c) (2) (c) 594-88 425-93 Makalintal, Barot, Torres & Ibarra Benpres Bldg., Meralco Avenue 1600 Pasig, Metro Manila This refers to your letters dated August 25 and September 27, 1993 requesting for confirmation of your opinion that no gain or loss is recognized on the transfer by Benpres Corporation, PML, Inc. and MJL Agro-Development Corporation of their shareholdings in other corporations to Benpres Holdings Corporation in exchange for its shares of stock pursuant to Section 34(c)(2) of the Tax Code, as amended. It is represented that Benpres Holdings Corporation is a domestic corporation duly registered with the Securities and Exchange Commission; that as of August 29, 1993, the authorized capital stock of the corporation is One Million Pesos (P1,000,000.00) divided into One Million (1,000,000) shares with a par value of P1.00 per share, and the following stockholders: Name of Stockholder Shares Subscribed 1. Eugenio Lopez, Jr. 1,000 2. Pacita M. Lopez 1,000 3. Oscar M. Lopez 1,000 4. Manuel M. Lopez 1,000 5. Presentacion L. Psinakis 1,000 6. Benpres Corporation 123,750 7. PML, Inc. 100,000 8. MJL Agro-Development Corporation 25,000 Total 253,750 ====== that Benpres Corporation is the registered owner of shares of stock in the following corporations: No. of Acquisition Transfer Market Investment Shares Cost Value Value ABS-CBN 61,194,620 4,528,542 386,632,030 3,273,912,170 PCI Bank 19,580,438 269,485,297 888,783,633 2,937,065,700 FPHC "A" 25,043,199 356,136,564 1,194,916,686 1,389,897,545 FPHC "B" 601,972 29,859,893 28,722,624 37,021,278 385,996,457 1,223,639,310 1,426,918,823 MERALCO "A" 3,572,931 290,388,563 349,075,200 689,575,683 MERALCO "B" 136,350 27,955,002 13,321,389 30,951,450 318,34,565 318,343,565 362,396,589 720,527,133 Total 978,353,861 978,353,861 2,861,451,562 8,358,423,826 ========= ========= ========== ========== that PML, Inc. is the registered owner of shares of stock in the following corporations: No. of Acquisition Transfer Market Investment Shares Cost Value Value ABS-CBN 35,896,845 43,811 215,540,615 1,920,481,240 PCI Bank 258,737 3,998,419 11,786,475 38,810,550 FPHC "A" 95,585 1,219,061 4,338,800 5,304,968 MERALCO "A" 8,368 1,402,510 1,509,960 1,615,024 Total 6,663,801 233,175,850 1,966,211,782 ======= ========= ========== that MJL Agro-Development Corporation is the registered owner of shares of stock in the following corporations: No. of Acquisition Transfer Market Investment Shares Cost Value Value ABS-CBN 25,895,970 45,000 210,534,236 1,385,434,395 that an Assignment Agreement was executed by Benpres Corporation, PML, Inc. and MJL Agro-Development Corporation (Assignors) whereby their stockholdings in the aforementioned corporations were transferred to Benpres Holdings Corporation (Assignee) in exchange for its shares of stock, thus, Benpres Corporation transferred its shareholdings in the aforementioned corporations in exchange for 2,066,264,396 common shares of the assignee valued at P2,066,264,396 and the assumption by the assignee of the loan obligation of Benpres Corporation to several creditors in the aggregate amount of P795,187,166.00; that PML transferred its shareholdings in the aforementioned corporations in exchange for 233,175,850 common shares of Benpres Holdings Corporation valued at P233,175,850; that MJL Agro-Development Corporation transferred its shareholdings in the aforementioned corporation in exchange for 210,534,236 common shares valued at P210,534,236; that as a result of the above transactions the assignors gained control of the assignee by owning 100% of the total voting stocks of the assignee; that the assignee's capital structure after the exchange will be as follows: No. of Shares Percentage 1. Benpres Corporation 2,066,388.146 82.32% 2. PML, Inc. 233,275,850 9.29% 3. MJL-Agro Dev. Corp. 210,559,236 8.39% 4. Pacita M. Lopez 1,000 0% 5. Eugenio Lopez, Jr. 1,000 0% 6. Oscar M. Lopez 1,000 0% 7. Manuel M. Lopez 1,000 0% 8. Presentacion Psinakis 1,000 0% 2,510,228,232 100.0% ========== ====== that the authorized capital stock of the assignee will be increased from One Million Pesos (P1,000,000.00) to Four Billion Pesos (P4,000,000,000.00) divided into Four Billion (4,000,000,000) shares; and that in support of your request, you submitted to this Office the following documents: a) Assignment Agreement; b) List and Description of the shares to be assigned to Benpres Holdings Corporation; c) Schedule of loans assumed by Benpres Holdings Corporation; d) Secretary's Certificate of Benpres Holdings Corporation authorized capitalization, par value of the shares and percentage of ownership; e) Articles of Incorporation of Benpres Holdings Corporation; f) Treasurer's Affidavit; and g) Other pertinent documents. In reply thereto, 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 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, 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 that no gain or loss shall be recognized both to the transferors-stockholders and the transferee corporation on the transfer by the assignors of their shareholdings in various corporations in exchange for shares of stock of the transferee corporation, Benpres Holdings Corporation, considering that as a consequence of the exchange, the assignors gained control of the corporation, by owning 100% of its total voting stocks, is hereby confirmed. It should be emphasized, however, that Section 34(c)(2) 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 transferors later sell or exchange the shares of stock acquired by them in the exchange, they 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 transferors 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 transferors. [Section 34(c)(5)(a) and (b) of the Tax Code, as amended by Presidential Decree No. 1773]. If pursuant to the exchange transaction, and as a part of the consideration, the transferee corporation assumes the liability of the transferors or acquires from the transferors property subject to a liability, such assumed or acquired liability shall not be treated as money and/or other property, and shall not prevent the exchange from being tax-free [See Sec. 34(c)(4)(a) of the Tax Code, as amended by P.D. No. 1773]. If the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceed the total of the adjusted cost basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be [Sec. 34(c)(4)(b) of the Tax Code, as amended by P.D. No. 1773]. The cost basis or value of the stocks received by the transferors of property subject to a liability, where the liability transferred and assumed by transferee corporation does not exceed the transferor's basis or the original and/or acquisition cost of the property transferred, shall be the difference between the liability or liabilities assumed by the transferee corporation and the acquisition or original cost of the property transferred. On the other hand, where the total liabilities to be assumed by the transferee corporation exceed the original or acquisition cost of the property transferred, the excess shall be recognized as gain to the transferors and the value or cost basis of the stocks to the transferors shall be the difference between the original cost of the property transferred subject to a liability (plus the gain recognized to the transferors) and the liability or liabilities assumed by the transferee corporation [Sec. 34(c)(5), supra]. 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) 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 transaction was consummated, a complete statement of all facts pertinent to the exchange, including: cdta 1. A description of the stock transferred, or of their interest on such stocks with a statement of the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer; 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 statement of all stocks 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 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 received in the exchange. The parties shall also cause to be annotated on the Certificates of Stock, 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 certificates of stock to be issued by Benpres Holdings Corporation are, in all probability original issues, which 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. cd LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue