BIR Ruling [UN-006-96]

January 2, 1996 BIR RULING [UN-006-96] Flores & Associates Unit 104, Ground Floor First Midland Condominium Bldg. Gamboa St., Legaspi Village Makati City Attention: Attys . Florecita P . Flores and Romeo H . Duran Gentlemen : This refers to your letter dated December 13, 1995 stating that Yutivo Investment Corporation (YIC) is a corporation organized and existing under the laws of the Philippines with principal office at 1007 United Nations Avenue, Ermita, Manila; that sometime in the late 1993, YIC decided to develop its major real estate holdings to improve its revenues; that the development plan of the properties would be done one after the other and in phases over time; that the efficient implementation of the development plan called for the organization of independent and separate corporations to hold title to the properties of YIC; that by separately incorporating the real estate properties, YIC would have the flexibility to deal with funding (which would be raised thru borrowings from banks and other financial intermediaries) on account of the single borrower's limit prescribed by law, planning and design, collateralizing the loan and other aspects of development; that in or about November 1993, Recto Properties Development, Inc.(RPDI) was organized to purchase, acquire, lease, develop or in any manner hold, own, use, sell, or turn into account or dispose of, land and real estate of any kind and description, but not to engage in the real estate subdivision business. . . , with an authorized capital stock of P2,000,000.00 divided into 20,000 shares with a par value of P100.00 per share. P500,000.00 worth of shares were subscribed and the amount of P125,000.00 was paid up; that subsequently, YIC transferred to RPDI its property together with the improvements thereon situated at Recto Avenue, Manila, in exchange for shares of stock of RPDI; that the said transfer of property in exchange for shares was qualified as a tax-deferred-transfer under the provisions of Section 34(c) (2) and 6(c) of the Tax Code, as amended; that after the transfer of the real property to RPDI, the tenants/lessees of the building were notified of plan to develop the property; that the tenants/lessees advised RPDI that they were not ready to vacate the premises leased to them and instead offered to buy the property, provided that it could be arranged in a manner that would enable them to hold on to the premises leased and occupied by them; that the only way that this could be done was for the stockholders of RPDI to sell their shareholdings to the tenants/lessees of the building and for the latter to divide among themselves the shares sold proportionate to the area occupied by them; that on November 24, 1994, YIC and the individual stockholders of RPDI sold all their shareholdings in RPDI consisting of 13,320 shares to the tenants/lessees for the total sum of P80,500,000.00 or at 6,403.54 per share; that on the said transaction, YIC and the individual stockholders paid the capital gains tax of 10% and 20% provided under Sections 24(e) (2) (A) and 21(d) (1) of the Tax Code, as amended, in the total amount of P15,617,889.29 details of which are as follows: Name of Stockholders Capital Gains Tax 1. Yutivo Investments Corporation P14,207,158.29 2. Peter C. L. Yu 201,533.00 3. Galo L. Lim 201,533.00 4. Daniel C. Yu 201,533.00 5. Alice Chen Cua 201,533.00 6. Sherwin G. Yu 201,533.00 7. Francis Yu 201,533.00 8. Lim Pek Chuan 201,533.00 Total: P15,617,889.29 =========== that the total sum of P6,660.00 was paid as documentary stamp tax prescribed under Section 176 of the Tax Code, as amended; and that the selling price was an amount which was beyond the book value of the shares sold at the time of the sale. In connection therewith, you are requesting confirmation of your opinion that the aforementioned transaction is subject to the capital gains tax of 10% on the first P100,000.00 of net capital gains and 20% on the excess imposed under Section 21(d) (1) and 24(e) (2) (A) both of the Tax Code, as amended. In reply thereto, please be informed that your opinion is hereby confirmed. Section 34(c) (2) and (6)(c) of the Tax Code merely defers recognition of the gain or loss from the exchange of properties, for in determining the gain or loss from a subsequent transaction of the real 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 transferor/stockholder will later sell or exchange the shares of stock acquired by him in the exchange, he shall be subject to income tax on the gains derived from such sale or exchange taking into consideration that the costs basis of the shares of stock 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. 34 (c) (5) (a) and (b), Tax Code, as amended by P.D. No. 1773) Accordingly, the basis for purposes of determining YIC's gain from the sale of its RPDI shares shall be the historical/original acquisition cost or adjusted basis to YIC of its real property (building) exchanged for the RPDI shares. Such being the case, the capital gains realized by YIC and the individual stockholders of RPDI from the sale of all their shareholdings in RPDI consisting of unlisted 13,320 shares which were acquired from a tax-deferred exchange of properties, to the tenants/lessees of the aforesaid building shall be subject to a tax of 10% if the capital gain is not over P100,000 and 20% if the capital gain is over P100,000 pursuant to Sections 24(e) (2) (A) and 21 (d) (1) both of the Tax Code, as amended. (BIR Ruling No. 163-90 dated August 27, 1990; BIR Ruling No. 221-91 dated October 31, 1991) The tax shall be paid by the seller-stockholders. This ruling is issued on the basis of the foregoing representations. However, if upon investigation, the facts turned out to be different, then this ruling shall be considered null and void. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)