BIR Ruling

April 7, 1969 Mr. Melquiades M. Virata Jr. Attorney-at-Law 617 Wyoming St., Mandaluyong, Rizal S i r : In reply to your letter dated March 15, 1969, I have the honor to inform you as follows: When conjugal partnership properties are transferred by husband and wife to a corporation in the process of organization who thereafter acquire complete control of the corporation, no gain or loss shall be recognized pursuant to Republic Act No. 4522. The same rule applies notwithstanding the fact that the properties transferred are subject to liabilities and such liabilities are assumed by the corporation. The non-recognition of the gain under such transaction shall not be affected by the fact that the creditor bank of the mortgaged properties transferred to the corporation requires the transferors husband and wife to consign jointly and severally with the corporation as regards the liabilities on the property. cdll If husband and wife in the foregoing transaction are already controlling stockholders of an existing corporation, and, in order to expand the capitalization of the corporation, they transfer their conjugal properties in the manner described in exchange for shares of stock, no gain or loss shall likewise be recognized. In this connection, it may be stated that in the case of transfer of properties subject to liabilities, the basis to the transferors of the shares received in exchange shall be the cost basis to the transferors of the properties transferred reduced by the amount of the liabilities assumed by the corporation. If the liabilities exceeds the cost basis of the properties transferred, the basis of the stocks received by the transferors shall be zero. It may be stated further that with respect to the corporation, the basis to it of the properties transferred shall be the same as it would be in the hands of the transferor. Applying the foregoing rules to your illustration, viz.: Property Acquisition Price Market Price Bank Lien Allotted Cap. X P10,000.00 P100,000.00 none P100,000.00 Y 10,000.00 100,000.00 P50,000.00 50,000.00 Z 10,000.00 100,000.00 60,000.00 40,000.00 the cost basis of the P50,000.00 worth of shares received as regards Y property is zero (Acquisition cost of P10,000.00 less liability of P50,000.00); of the P40,000 worth of shares received as regards Z property also zero (Acquisition cost of P10,000.00 less liability of P60,000.00) and of the P100,000.00 worth of shares received as regards X property, P10,000 (Original acquisition cost of the transferred property). To the corporation, the cost bases to it of XYZ properties are P10,000 each, the same that they would be in the hands of the transferors. In the light of all of the foregoing, your queries are answered in the affirmative. Finally, in connection with Republic Act No. 4522, both transferor and transferee must comply with the following requirements: "The transferor must file with his income tax return 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 his 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 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 return for the taxable year in which the exchange was consummated; "(1) A complete description of all property received from the transferor; "(2) A statement of the original acquisition cost or other basis thereof in the hands of the transferor 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; "(b) the classes of stock and number of shares issued to the transferor in the exchange; "(c) the fair market value of the capital stock as of the date of exchange which was issued to the transferor;" 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 stock received in the exchange. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue