September 10, 1981

BIR RULING NO. 171-81

035-o-2-c 10-81 171-81

Sycip, Gorres, Velayo & Co.

P.O. Box 589, Manila
Attention: Mr. B . V . Abela
Tax Division

Gentlemen :

This refers to your letter dated May 4, 1981 requesting a ruling on the
tax consequence of the plan of your client, the San Miguel Corporation to
transfer substantially all the assets of one of its operating divisions to a new
corporation.
It is represented that, San Miguel Corporation (SMC), a Philippine
corporation majority-owned by Filipinos, is a manufacturing concern which
operates several independent divisions; that it proposes to transfer all the
assets of one of its operating divisions to a new corporation, Coca-Cola
Bottlers Phils., Inc. (CCBPI) solely in exchange for shares of stock of CCBPI,
which will be jointly owned by SMC, the Coca-Cola Export Corporation-
Philippines (TCCEC), resident foreign corporation duly licensed to do
business in the Philippines, and Refreshment Sales, Inc. (RSI), a non-resident
foreign corporation domiciled in the U.S. and a wholly-owned subsidiary of
TCCEC; that the assets to be transferred by SMC will consist of fixed assets
(machinery and equipment, transportation equipment, buildings) and non-
fixed assets (inventories, accounts receivables, and prepayments); that the
assets to be transferred by SMC have outstanding liabilities which will be
assumed by CCBPI; that the net assets of SMC will be exchanged at market
value for common shares of stock; that TCCEC will also transfer some of its
branch assets consisting of machinery and equipment solely for CCBPI stock;
that RSI will transfer cash for CCBPI stocks; that with respect to the
outstanding liabilities of SMC which will be assumed by CCBPI, a portion of
the liabilities will be directly assumed and paid by CCBPI; that due to
administrative difficulties such as obtaining consent from many creditors and
suppliers, the remaining portion of the liabilities will initially be paid by SMC
and CCBPI will subsequently reimburse the same amount to SMC; the
transfer of one of the business of SMC into a new company is for the purpose
of making it possible for CCBPI to take in new investors; and that after the
transfer, CCBPI will be totally owned by SMC, TCCEC, and RSI to the extent of
70%, 2.25% and 27.75% respectively. cdtech

In reply thereto, I have the honor to inform you that pursuant to

Section 35 paragraph (c)(2)(c) of the Tax Code as amended by Republic Act
No. 4522 and Presidential Decree Nos. 1705 and 1773 no gain or loss shall
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 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, along or together with others, not exceeding four
persons, gains control of said corporation. The term "control" shall mean
ownership of stocks vested with at least fifty-one (51%) percent of the total
voting power of all classes of stocks entitled to vote. 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 both to the transferors
and the transferee corporation, on the transfer by SMC and TCCEC of their
assets and liabilities in exchange for the shares of stock of CCBPI,
considering that as a result of the said exchange, SMC and TCCEC will gain
control of the transferee corporation.
No gift tax is payable under the abovementioned transaction as SMC
and TCCEC will receive in exchange for the assets transferred by them
shares of stock of equivalent value.
It should be emphasized, however, that Section 35(c)(2)(c) of the Tax
Code merely defers recognition of 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 the 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 the gains derived from such sale or exchange,
taking into consideration that the cost basis of the shares of stock shall be
the same as the original acquisition cost or adjusted cost basis to the
transferors of the properties exchanged therefor; and that the cost basis to
the transferee of the properties exchanged for stock shall be the same as it
would be in the hands of the transferors. (Section 35(c)(5)(b) of the Tax
Code.)
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 assumption or acquisition shall not be treated as money and or other
property, and shall not prevent the exchange from being tax free. (See Sec.
35(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. 35(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 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
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 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. cda

In this connection, you are further advised that in order that the parties
to the exchange can avail of the non-recognition of gain provided for in
Section 35(c)(2) (c) 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 was consummated a
complete statement of all facts pertinent to the exchange,
including:
(1) A description of the property transferred, or of their
respective interest in such property, together with a
statement of the original acquisition cost or other basis
thereof and the adjusted cost basis at the time of the
transfer;
(2) The kind of stock received and preference, 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 property received from the

transferors;

(2) A statement of the original acquisition cost or other basis

thereof in the hands of the transferors and the adjusted
cost basis 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 stock and number of shares issued to

the transferors in the exchange; and
cdt

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 (c) The fair market value of the capital stock as of the
date of exchange which was 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. All said requirements
should be complied with; otherwise, the exchange shall not be considered an
exempt transaction within the purview of Section 35(c) of the Tax Code. cdt

Very truly yours,

RUBEN B. ANCHETA
Acting Commissioner

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