06-07-2005 BIR Ruling [DA-244-05]

June 7, 2005
BIR RULING [DA-244-05]
40 (C) (2) & (3); 115-98
National Home Mortgage and
Finance Corporation
Filomena Building III
Amorsolo St., Legaspi Village
Makati City
Attention: Mr. Celso delos Angeles
President
Gentlemen :
This refers to your letters dated 14 December 2004 and 18 May 2005 requesting for
our confirmation that no gain or loss shall be recognized by the National Home
Mortgage Finance Corporation (NHMFC) upon the transfer of its mortgage loan
receivables in favor of the BALIKATAN HOUSING, INC. (the "Corporation") in
exchange for the latter's shares of stock and other debt instruments under Section
40(C)(2) of the Tax Code. cEATSI
It is represented that the NHMFC is a corporation created by virtue of Presidential
Decree No. 1267 (1977); that among its objectives are to: (a) develop and provide
for a secondary market for home mortgages granted by public and/or private home
financing institutions [Pres. Decree No. 1267 (1977)]; (b) act as the major
government home mortgage institution [Exec. Order No. 90 (1986)]; and (c) develop
and provide a secondary mortgage market to finance mortgage take and fast track
the disposition of existing mortgages [Exec. Order No. 195 (1999)]; that in line with
its objectives, NHMFC provided financing for various low-cost housing projects and
took over the various loan mortgage accounts of the buyers of houses and lots and
that over the years, many of these loan mortgage accounts defaulted and NHMFC
began to accumulate a portfolio of non-performing loans ("NPLs"); that in order to
liquefy some fifty-five thousand (55,000) of its highly delinquent NPLs, NHMFC
obtained approval from the Office of the President of the Philippines to incorporate
the Corporation as a vehicle for holding on to the NPLs and to serve as an eventual
entry point for other investors; that in light of the Presidential approval, the
Corporation was incorporated with the Securities and Exchange Commission with an
authorized capital stock of Two Hundred Million Pesos (P200,000,000.00) divided

into Two Hundred Thousand (200,000) common shares with a par value of One
Hundred Pesos (P100.00) per share and One Hundred Eighty Thousand (180,000)
redeemable preferred shares with a par value of (P1,000.00) per share; that out of
the Corporation's authorized capital stock of Two Hundred Million Pesos
(P200,000,000.00), Forty-Nine Thousand (49,000) common shares with a par value
of Four Million Nine Hundred Thousand Pesos (P4,900,000.00) and Fifty-Eight
Thousand (58,000) redeemable preferred shares with a par value of Fifty-Eight
Million Pesos (P58,000,000.00) have been subscribed and fully paid by NHMFC; that
in full payment of its subscription, NHMFC executed a Deed of Assignment dated 13
December 2004 assigning the NPLs with an aggregate book value of approximately
Thirteen Billion Four Hundred Fifty Three Million Eight Hundred Six Thousand Five
Hundred Sixty Two Pesos and Sixty Centavos (P13,453,806,562.60) (hereinafter
referred to as the "Receivables") at an aggregate transfer value of Five Billion One
Hundred Twenty-Three Million Two Hundred Nine Thousand Five Hundred Thirty-Nine
Pesos and Five Centavos (P5,123,209,539.05) in favor of the Corporation. On 18
May 2005, NHMFC and the Corporation executed an Amended Deed of Assignment
of Receivables to reflect mathematical adjustments made with respect to the
number and value of the mortgage loan receivables resulting in a reduction of the
book value of the receivables from P13,453,806,562.60 to P12,837,966,661.00 and
an increase in the transfer value of such mortgage loan receivables to
PhP5,172,936,190.00 instead of PhP5,123,209,539.05. Thus, pursuant to the Deed
of Assignment of Receivables dated as of 13 December 2004 and following the
execution of the Amendment to Deed of Assignment of Receivables dated as of 18
May 2005, the Corporation issued the following equity and debt instruments in favor
of NHMFC in exchange for the Receivables:
a.

Equity
Type of Stock
Premium

No. of Shares

Par Value per

Paid-in

share
Preferred

58,000

1,000.00

P58,000,000.00

P688,450,747.55

Common

49,000

100.00

4,900,000.00

Total 107,000
b.

P62,900,000.00

P688,450,747.55

Debt
Instrument

Issue Value

Senior Debt Instruments + Additional Senior Debt Instruments

3,103,761,714.00

Series "A" Subordinated Debt Instrument + Additional Series "A" 1,055,278,982.76

Subordinated Debt Instrument

Series "B" Subordinated Debt Instrument + Additional Series "B" 262,544,745.69
Subordinated Debt Instrument
Total

4,421,585,442.45

After the transfer by the NHMFC of the Receivables in exchange for the abovedescribed equity and debt instruments, the outstanding capital stock of the
Corporation is as follows:
Name of Shareholder
Shares

No. of Par Value

Amount

Premium

Voting

Per share

Paid-Up

Power

58,000

1,000.00

P58,000,000.00

P688,450,747.55

100.00

P4,899,500.00

Preferred Shares
National Home
-

Mortgage and Finance

Corporation
Common Shares
National Home

48,995

100%

Mortgage and Finance

Corporation
1

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

Total Common

49,000

Grand Total 107,000

4,900,000.00
P62,900,000.00

100%

P688,450,747.55

100%

That as a result of the above-described transfer, NHMFC gained control of the

Corporation; that based on the above-mentioned transactions, you requested our
confirmation of your opinion that:
"1.
No gain or loss shall be recognized on the transfer by the NHMFC of the
Receivables to the Corporation in exchange for 100% of the outstanding voting
stock of the Corporation, pursuant to Section 40(C)(2) and (C)(6) of the Tax Code;
"2.
The basis of the shares of stock or debt instruments NHMFC acquired in the
exchange shall be the same as the original acquisition cost or adjusted cost basis to
NHMFC of the Receivables exchanged therefor; and the cost basis to the
Corporation of the Receivables exchanged for stocks shall be the same as it would
be in the hands of NHMFC, pursuant to Section 40(C)(5)(a) and (b) of the Tax Code;
"3.
The transfer of the Receivables by NHMFC to the Corporation will not be
subject to value-added tax (VAT);
"4.
The transfer of the Receivables by NHMFC to the Corporation in exchange for
shares of stock and debt instruments shall not be subject to donor's tax;
"5.
The transfer by NHMFC to the Corporation of the Receivables is exempt from
DST pursuant to Section 199(m) of the Tax Code, as amended by Republic Act No.
9243;
"6.
The issuance of shares by the Corporation to NHMFC in exchange of the
Receivables will be subject to the DST imposed under Section 174 of the Tax Code,
as amended by Republic Act No. 9243; and
"7.
The issuance of the debt instruments by the Corporation to NHMFC in
exchange for the Receivables will be subject to the DST imposed under Section 179
of the Tax Code, as amended by Republic Act No. 9243. However, no DST shall be
due on the subsequent assignment, transfer, or amendment thereof provided there
is no increase in the amount or change in the maturity date from that of the original
instrument pursuant to Section 199(f) of the Tax Code."
and that in support of your request, you submitted to this office copies of the
following documents: (1) BIR Form No. 0605 evidencing payment of the filing fees;
(2) Deed of Assignment of the Receivables executed by and between NHMFC and
the Corporation dated 13 December 2004; (3) Amended Deed of Assignment of
Receivables executed by and between NHMFC and the Corporation dated 18 May
2005; (4) certified list of the Receivables to be transferred; (5) A certification as to
the original or historical cost or acquisition/adjusted cost basis of the Receivables;
(6) Articles of Incorporation and By-Laws of the Corporation as filed with the
Securities and Exchange Commission; and (7) Audited Financial Statements of
NHMFC as of December 31, 2003.

In reply, please be informed that pursuant to Section 40(C)(2) and (6)(c) of the Tax
Code of 1997, no gain or loss shall 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, 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
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.
Section 40(C)(3)(a) of the 1997 Tax Code further states that if, in connection with
the above-described exchange, an individual, a shareholder, security holder or
corporation receives not only stock or securities permitted to be received without
recognition of gain or loss, but also money and/or other property, the gain, if any,
but not the loss, shall be recognized but in an amount not in excess of the sum of
the money and the fair market value of such other property received. Pursuant to
Section 40(A) of the same Tax Code, the gain from the sale or other disposition of
property shall be the excess of the amount realized therefrom over the basis or
adjusted basis for determining gain, and the loss shall be the excess of the basis or
adjusted basis for determining loss over the amount realized. The amount realized
from the sale or other disposition of property shall be the sum of money received
plus the fair market value of the property (other than money) received. In an
assignment of receivables, the gain shall be the excess of the amount realized
therefrom over the cost or adjusted cost of the receivables and the loss to be
recognized by the transferee from the assignment of receivables shall be the excess
of the cost or adjusted cost of the receivables over the amount realized. The
amount to be realized from the assignment of receivables is determined by
considering the selling/transfer price of the receivables shall be the fair market
value of the property received in exchange therefor and not the fair market value of
the receivables transferred. (BIR Ruling No. 15-98 dated July 28, 1998)
Accordingly, no gain or loss shall be recognized both to the transferors and the
transferee corporation on the transfer by NHMFC of the Receivables in exchange for
the common shares, redeemable preferred shares of stock and debt instruments
issued by the transferee corporation, considering that as a consequence of the
exchange, the transferor will gain control of the transferee corporation by owning
100% of its total voting stocks. Notwithstanding acceptance by NHMC of property
consisting of debt instruments other than shares of stock to be issued by the
Corporation in exchange for the Receivables, NHMFC will not realize any gains by
virtue of the transaction since NHMFC will be transferring property consisting of the
Receivables with a book value of approximately P12,837,966,661.00 in exchange for

shares of stock and debt instruments with an aggregate par value of only
P4,484,485,442.45. CScTDE
It should be emphasized, however, that Section 40(C)(2) and (6)(c) of the 1997 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 NHMFC later sells or exchanges the shares of stock
or debt instruments it acquired in the exchange, it shall be subject to income tax on
gains derived from such sale or exchange, taking into consideration that the cost
basis of the shares and debt instruments shall be the same as the original
acquisition cost or adjusted cost basis to the NHMFC of the Receivables exchanged
therefor, and that the cost basis to Balikatan of the Receivables exchanged for
stocks and the debt instruments shall be the same as it would be in the hands of
NHMFC. (Section 40(C)(5)(a) and (b) of the Tax Code)
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 40(C)(2)
and (6)(c) of the Tax Code of 1997, as amended, they should comply with the
requirements hereunder mentioned:
a.
The transferor must file with its 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 its 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 or other properties 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 the 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 and other property 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. HICSaD
Furthermore, your opinion on the following are likewise hereby confirmed:
(1)
Pursuant to Section 4.100-5(b)(1) of Revenue Regulations No. 7-95, as
amended, a change of control of a corporation by the acquisition of the controlling
interest of such corporation by another stockholder or group of stockholders shall
not be subject to output tax. Example: transfer of property to a corporation in
exchange for its shares of stock under Section 40(C)(2) and (6)(c) of the 1997 Tax
Code. Consequently, the transfer of the Receivables by NHMFC to Balikatan will not
be subject to value added tax;
(2)
The transfer of the Receivables by NHMFC to Balikatan in exchange for
common shares, redeemable preferred shares, and debt instruments shall not be
subject to donor's tax since there is no donative intent involved in the transfer. (BIR
Ruling No. 224-93 dated May 18, 1993)
(3)
The certificates of stocks to be issued by Balikatan are subject to the
documentary stamp tax at the rate of P1.00 for every P200.00, or a fractional part
thereof, of the par value of the shares issued pursuant to Section 174 of the Tax
Code, as amended by Republic Act No. 9243, which shall attach upon issuance by
the SEC of Balikatan's Certificate of Incorporation.
(4)
The documentary stamp tax due on the issuance of the Senior Debt
Instrument, Series "A" Subordinated Debt Instrument, Series "B" Subordinated Debt
Instrument and the Additional Senior and Subordinated Debt Instruments by
Balikatan shall be subject to P1.00 for every P200.00, or a fractional part thereof, of
the issue value of the debt instruments pursuant to Section 179 of the Tax Code, as
amended by Republic Act No. 9243. However, the subsequent assignment, transfer
or amendment of such debt instruments by NHMFC shall not be subject to DST
provided that there is no increase in the amount or change in the maturity date
from that of the original instrument pursuant to Section 199(f) of the Tax Code of
1997, as amended by Republic Act No. 9243. ADTCaI
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be ascertained that the facts are different

and/or any of the requirements imposed in this letter is not complied with, then this
ruling shall be considered null and void. THIAaD
Very truly yours,
Commissioner of Internal Revenue
By:
(SGD.) JAMES H. ROLDAN
Assistant Commissioner
Legal Service

C o p y r i g h t 2 0 0 8 C D T e c h n o l o g i e s A s i a, I n c.

06-03-2005 BIR Ruling [DA-243-05]