BIR Ruling [UN-220-94]

July 25, 1994 BIR RULING [UN-220-94] Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati, Metro Manila Attention: Messrs . R . R . Rubio & R . L . Tan Gentlemen : This refers to your letter dated July 16, 1993 requesting confirmation of your opinion that no gain or loss shall be recognized on the transfer of properties by Great Pacific Timber and Development Corporation (GPTDC) and House of Investments (HI) solely in exchange for the shares of stock of Satellite Properties Estate Corporation (SPEC) pursuant to Section 34 (c) (2) and (6) (c) of the Tax Code, as amended. It is represented that GPTDC, is a domestic corporation engaged in the logging and real estate business and duly organized and existing under and by virtue of the laws of the Philippines; that HI is also a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines and currently owns 100% of the shares of GPTDC; that GPTDC is the absolute owner of fixed assets consisting of real properties with an aggregate net book value based on cost of P5,089,605 as of December 31, 1992; that it is also the absolute owner of other assets consisting of shares of stock in various corporations with an aggregate net book value based on cost of P45,490,759 as of December 31, 1992; that GPTDC will declare the aforementioned real properties as property dividends to its stockholder, HI; that said real properties are covered by Transfer Certificates of Title Nos. T-82473, N-84569, T-35941, and T-7667 issued by the Register of Deeds of Lipa City, Marikina, City of Baguio, and the Province of Western Samar, respectively, with a total net book value of P6,446,880; that on the other hand, SPEC is a domestic corporation engaged in the real estate business, duly organized and existing under the laws of the Philippines; that SPEC has an authorized capital stock of P160,000,000.00 divided into 1,600,000 shares with a par value of P100.00 per share; that of the total authorized capital stock, 400,000 shares with a total par value of P40,000,000.00 have been subscribed as follows: cdtech No. of Amount Name Shares Subscribed House of Investments 399,995 P39,999,500 Helen Y. Dee 1 100 Alfonso S. Yuchengco 1 100 Pedro R. Changco 1 100 Albert Eufemio 1 100 Marcelo T. Dy 1 100 Total 400,000 P40,000,000 ======== ========= that for the purpose of consolidating its operations under one company, and for SPEC to gain efficiencies and competitiveness in the real estate business, HI and GPTDC propose to exchange the aforementioned real properties and shares of stock in various corporations, respectively, solely for 905,798.54 shares of SPEC; that as a result of such exchange, GPTDC and HI will together own 99.99% of the voting stock of SPEC as follows: No. of Amount Name Shares Subscribed House of Investments 464,463.80 P46,446,308.00 GPTDC 454,907.59 45,490,759.00 Helen Y. Dee 1.00 100.00 Alfonso S. Yuchengco 1.00 100.00 Pedro R. Changco 1.00 100.00 Albert Eufemio 1.00 100.00 Marcelo T. Dy 1.00 100.00 Total 919,376.39 P91,937,639.00 ========== =========== that in support of your request, you submitted to this Office photocopies of the following documents: (a) deeds of assignment; (b) articles of incorporation duly registered with the SEC of the transferors and transferee corporation; (c) copies of the transfer certificates of title and the corresponding tax declarations; (d) certification as to the original or historical cost of acquisition/adjusted cost basis of the property transferred; (e) certification by the corporate secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stock; (f) certification of percentage of ownership of the shares of stock by the transferors as a result of the transaction; and (g) other pertinent documents. In reply, please be informed as follows: The property dividend consisting of real properties to be declared by GPTDC to HI is not subject to any withholding tax pursuant to Section 24 (e) (4) of the Tax Code, as amended. Moreover, HI, the recipient corporation, is not subject to any income or capital gains tax arising from its receipt of the assets as property dividends. The property dividend shall be recorded in the books of both GPTDC, the issuing corporation, and HI, the recipient corporation, at book value. GPTDC, the issuing corporation, will not be subject to any income or capital gains tax on the excess of the fair market value of the assets declared as property dividend because there is no realized gain. Upon the subsequent sale or other disposition of the assets received as property dividends by HI, the basis of the assets shall also be their book value at the time of the property dividend declaration (BIR Ruling Nos. 276-91 and 277-93 dated December 26, 1991 and June 28, 1993, respectively). Moreover, pursuant to Section 34 (c) (2) and (6) (c) of the Tax Code, as amended by Republic Act No. 4522 and Presidential Decree 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 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., subscribed, whether for property or for services by the transferors. In determining the 51% stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized on the part of HI and GPTDC, the transferors, and on the part of SPEC, the transferee, upon the transfer of the aforementioned assets by HI and GPTDC in exchange for shares of stock of SPEC, considering that as a result of said exchange, the transferors will control 99.9% of the voting stocks of SPEC, the transferee-corporation. 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 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 properties exchanged therefore; and that the cost basis to the transferee of the properties 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 transferor or acquires from the transferor property subject to a liability and the liability transferred and assumed by the transferee does not exceed the transferor's basis or the adjusted cost basis of the property transferred, 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 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). The cost basis or value of the stocks received by the transferor 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 transferor and the value or cost basis of the stocks to the transferor shall be the difference between the original cost of the property transferred subject to a liability (plus the gain recognized to the transferor) and the liability or liabilities assumed by the transferee corporation. (Sec. 34 [c][5], supra.) The transfer of the aforementioned assets by HI and GPTDC in exchange for SPEC shares will not be considered as transfer of property for insufficient consideration subject to gift tax, since there is no intention to donate on the part of any of the parties and the transaction is effected solely for business reasons. In connection with the aforementioned exchange, 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: 1. The transferor-corporations must file with their income tax return for the taxable year in which the exchange was consummated a complete statement of all facts pertinent to the exchange, including: a. A description of the properties transferred, or of their interest in such properties, together with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfer; b. The kind of stock received and preferences, if any; c. The number of shares of each class received; and d. The fair market value per share of each class at the date of the exchange. 2. 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: a. A complete description of all properties received from the transferors; b. 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 c. Information with respect to the capital stock of the corporation including: i. The total issued and outstanding capital stock immediately prior to and immediately after the exchange with a complete description of each class of stock; ii. The classes of stocks and number of shares issued to the transferors in the exchange; and iii. 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 on the Transfer Certificates of Title and 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 properties or shares of stock involved; and the fact that no gain or loss was recognized as a result of such exchange. Moreover, pursuant to Section 196 of the Tax Code, as amended, a conveyance or deed whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for such realty. A stock in a corporation is a valuable consideration for transfer of real property. (Section 177, Documentary Stamp Tax Regulations). Accordingly, if a parcel of land, is exchanged with stocks in a corporation as in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the Deed of Assignment executed to effect the aforesaid transfer (BIR Ruling No. 246-00-000-00-109-82 dated April 06, 1982). The value shall be the fair market value which shall not be less than the par value of the stocks. Finally, the certificate of stocks to be issued by Satellite Properties Estate 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. After payment of the corresponding documentary stamp tax, the real property may be registered by the Register of Deeds concerned in the name of the transferee corporation, Satellite Properties Estate Corporation. 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 (BIR Ruling No. 278-93 dated June 28, 1993). cdtech Very truly yours, ALICIA P. CLEMENO Acting Assistant Commissioner Legal Service