BIR Ruling

December 6, 1972 Carlos J. Valdes & Co. 1130 Perez Street Paco, Manila Gentlemen : This refers to your letter dated November 27, 1972 requesting a ruling on the tax consequence of the contemplated transfer of certain real estate properties by your client, The Heirs of M. Rufino, Inc., a duly registered corporation to several other corporations in exchange for the latter's shares of stock. In this connection, you asked the following questions: l. If the real estate properties were transferred to various corporations the consideration of which net of liabilities assumed shall be paid exclusively in shares of stock of the latter as a result of which our client would gain control of said corporations, would said transfer fall within the aforequoted exception and thus no gain or loss shall be recognized on the transaction? 2. At what value should the Heirs of M. Rufino, Inc. carry the shares of stock received in exchange of the property transferred if the consideration was (a) based on book value or (b) based on assessed value? 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 loss 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 by your client of its aforesaid properties solely in exchange for shares of stock of each of the transferee corporations and the latter's assumption of the transferor's liabilities, it appearing that the transferor will subsequently gain control of the transferee corporation. It is understood that by "control" here is meant ownership of stocks in a corporation possessing at least fifty-one (51%) per cent of the total voting power of all classes of stock entitled to vote. If pursuant to the exchange transaction, and as part of the consideration, the transferee corporation assumes the liability of the transferor or acquires from the transferor property subject to a liability, such assumed liability or liabilities shall not be treated as money and/or other property, and shall not prevent the exchange from being tax-free. (See Sec. 35(C)(3)(c), N.I.R.C.) No gain or loss will be recognized on the obligation assumed by the transferee corporation. cdti In case of transfer of property to a corporation in exchange for its shares of stock, the basis of the property transferred in the hands of the transferee corporation shall be the same as it would be in the hands of the transferor, increased by the amount of the gain recognized to the transferor on the transfer. The acquisition cost to the transferor of the shares of stock shall be the same as the acquisition cost of the property given in exchange. (Sec. 35(c)(4)(b) N.I.R.C.) However, irrespective of whether the shares of stock adverted to in your inquiry were to be issued on the basis of their book value or assessed value, value of such shares to your client would depend on whether or not the liability transferred and assumed by transferee corporation exceeds the transferor's basis or the original and/or acquisition cost of the property transferred. 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 cost basis or acquisition cost of the property transferred, the excess or difference shall be recognized as gain to the transferor and the value or cost basis of the stocks (to the transferor) received in exchange is wiped out and becomes zero. (See Sec. 35(C)(4)(a) and (b), N.I.R.C.) In connection with the exchange herein involved, the transferor must file with its 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 its interest in such property, together with a statement of the original acquisition cost or 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 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 corporations 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. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue