Transfer of Helen Y. Dee's Property for Shares of Stock in Hydee MGT. Corp. Qualifies as a Tax-Free Exchange

November 4, 1993 BIR RULING NO. 427-93 TRANSFER OF HELEN Y. DEE'S PROPERTY FOR SHARES OF STOCK IN HYDEE MGT. CORP. QUALIFIES AS A TAX-FREE EXCHANGE 34 (c) (2) & (6) (c) 000-00 427-93 Cabote, Ignacio, Dizon & Dulce Suite 707 & 709 7th Floor, National Life Insurance Bldg. 6762 Ayala Ave., Makati, Metro Manila Attention: Atty . Remulus E . Cabote This refers to your letter dated April 27, 1993 requesting in behalf of your client, Mrs. Helen Y. Dee (HYD) for a ruling that the proposed transfer of HYDEE Management & Resource Corporation (HYDEE) of her shares in Pan Malayan Management and Investment Corporation (PMMIC) qualifies as a tax-free exchange of property in accordance with Revenue Memorandum Order No. 26-92, and falling under Section 34(c)(2) and (6) (c) of the Tax Code, as amended. It is represented that HYD is the registered owner of a total of 521,900 fully paid shares of the capital stock of PMMIC with a par value of P10.00 per share. On the other hand, HYDEE is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Ten Million Pesos (P10,000,000.00) divided into Four Thousand (4,000) common shares and Nine Hundred Ninety-Six Thousand (996,000) preferred shares with a par value of Ten Pesos (P10.00) per share, of which Four Thousand (4,000) common shares and Seven Hundred Thousand (700,000) preferred shares are subscribed and fully paid by the following stockholders: LexLib Ownership Stockholders Shares Par Value Percentage Common Shares: Helen Y. Dee 4,000 P40,000.00 100% Preferred Shares: Helen Y. Dee 518,789 P5,187,890.00 71.11% Michael Y. Dee 60,400 604,000.00 8.63% Michele Y. Dee 60,400 604,000.00 8.63% Johanna Y. Dee 60,400 604,000.00 8.63% Peter S. Dee 5 50.00 Marcelo T. Dy 5 50.00 Antonio B. Lapid 1 10.00 Total 700,000 P7,000,000.00 100.00% ====== ========== ====== that HYDEE is increasing its authorized capital stock from P10 Million to P30 Million divided into 10,000 common shares and 2,990,000 preferred shares, both at the par value of P10 each share, thereby reflecting an increase of P20 Million; that out of said increase, HYD shall subscribe to 521,900 preferred shares of stock at a price of P10 per share, and pay said subscription through the assignment to HYDEE of 521,900 shares in PMMIC at a value of P10.00 per share; that after the increase in its authorized capital stock, the resulting outstanding capital stock of HYDEE shall be as follows: Ownership Stockholders Shares Par Value Percentage Common Shares: Helen Y. Dee 4,000 P40,000.00 100% Preferred Shares: Helen Y. Dee 1,040,689 P10,406,890.00 71.11% Michael Y. Dee 60,400 604,000.00 8.63% Michele Y. Dee 60,400 604,000.00 8.63% Johanna Y. Dee 60,400 604,000.00 8.63% Peter S. Dee 5 50.00 Marcelo T. Dy 5 50.00 Antonio B. Lapid 1 10.00 Total 1,221,900 P12,219,000.00 100.00% ======== =========== ======= that as a result of transferor's (HYD) subscription to the increase in the authorized capital stock of HYDEE, to be paid through the transfer of HYD's share in PMMIC to HYDEE, the transferor (HYD) shall retain 100% control of HYDEE with the total percentage of her shareholdings therein increasing from 74.11% to 85.18%; and that in support of your request, you submitted to this Office photocopies of the following documents: 1. Deed of Assignment; 2. Amended Articles of Incorporation of HYDEE Management & Resources Corporation; 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 as to the original or historical cost of acquisition of PMMIC shares to be transferred to HYDEE; and 5. Certification by the Corporate Secretary of HYDEE of its present as well as the resulting capitalization after the increase of the capital stock, and the respective resulting percentages of shareholdings in HYDEE of the Transferor (HYD) after the exchange transaction. In reply thereto, I have the honor to inform you that pursuant to Section 34, paragraph (c)(2) and (6)(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 transferor and the transferee corporation on the transfer by the transferor (HYD) of her shares in PMMIC in exchange for shares of stock of the transferee corporation, HYDEE, considering that as a consequence of the exchange, the transferor retained control of the transferee corporation, is hereby confirmed. It should be emphasized, however, that Section 34(c)(2) and (6)(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 her in the exchange, she 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 shares/properties exchanged therefor; and that the cost basis to the transferee of the shares/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) of the 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) and (6)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned: a. The transferor must file with her 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 her 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; 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 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 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 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 stocks to be issued by HYDEE, 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. aisadc LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue