BIR Ruling

March 12, 1974 Messrs. Joaquin, Cunanan & Co. Certified Public Accountants 8th Floor Rufino Bldg. 6784 Ayala Ave. Makati, Rizal Gentlemen : This refers to your letter dated February 1, 1974 requesting information on the tax consequence of the following transaction: It is represented that Marilo Realty Development Corporation, Manila, a corporation engaged in realty business, has authorized capital stock of P2 million (20,000 shares at P100 per value per share), with subscribed capital of P400,000, that the following are the incorporators-subscribers: Amount Subscribed Cirilo Lacson P240,000 Maria J. de Lopez 100,000 Domingo Fronterer 20,000 Lourdes L. Abaya 20,000 Filemon Flores 20,000 P400,000 ======= that the corporation needs additional capital, so it is proposed that Mrs. Maria J. de Lopez, one of the subscribers above, together with her three sons who have no present interest in the company, would transfer their properties to the corporation in exchange for the P1,600,000 unsubscribed stock of the company, and that the transfer of the assets of Mrs. J. de Lopez and her three sons for the unsubscribed portion of the company's capital stock would result in the control of the company by Mrs. Lopez and her three sons, or the four transferors. 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, no gain or less shall be recognized if a person exchanges his property for stock in 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. Accordingly, no gain or loss shall be recognized on the transfer of the aforesaid properties solely in exchange for shares of stock of the real estate corporation adverted to in your query, it appearing that Mrs. Lopez and her three (3) sons will subsequently gain control of the transferee corporation. The term "control" shall mean ownership of stocks in a corporation possessing at least fifty-one (51%) percent of the total voting power of all classes of stocks entitled to vote. In connection with the exchange herein involved, 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 properties transferred, or of his or her interest in such property, together with a statement of the original acquisition cost of other basis thereof at the time of transfer; (2) The kind of stock received and preference if any; (3) The number of shares of each class received; (4) The fair market value per share of each class at the date of the exchange; On the other hand, the transferee corporation must file with its income tax returns for the taxable year in which the exchange was consummated: (1) A complete description of all properties received from the transferors; (2) A statement of the original acquisition costs or other basis thereof in the hands of the transferors and the adjusted cost basis at the time of transfer; (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 complete description of each class of stock; cdta (b) The classes of stock and number of shares issued to the transferors in the exchange; (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 taxpayer participating in the exchange showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received in exchange. aisa dc Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."