BIR Ruling

October 24, 1973 The President & General Manager Tacloban Electric and Ice Plants Co., Inc. 164-176 J. Romualdez Street Tacloban City S i r : This refers to your letter dated October 15, 1973 requesting information as to the tax incidents of your contemplated plan of reorganization. cdtech It is represented that by virtue of Presidential Decree No. 40 and Letter of Instruction No. 38, you have adopted a plan of reorganization substantially to be accomplished as follows: "Tacloban Electric and Ice Plants Co., Inc., has presently eight stockholders with two owning a majority of the subscribed capital stock and outstanding. "Initially, the stockholders of Tacloban Electric and Ice Plants Co., Inc. will organize a corporation to be denominated Tacloban Ice Plant, Inc. Thereafter, Tacloban Electric and Ice Plants Co., will transfer all its assets comprising the ice plant, such as lands, buildings, equipment and machineries to Tacloban Ice Plant, Inc. at fair market value in exchange for the latter's shares of stock. For this purpose, Tacloban Ice Plant, Inc. will increase its capital to a sufficient amount to absorb the assets to be transferred. After the exchange, Tacloban Electric and Ice Plants Co., Inc. will gain control of Tacloban Ice Plant, Inc. to the extent of more than 51% of the total voting power of all classes of stock entitled to vote. Immediately thereafter, Tacloban Electric and Ice Plant Co., Inc. will distribute its Tacloban Ice Plant shares proportionately to its stockholders in exchange for its own shares." You now ask the following questions: "1. Does the transfer by Tacloban Electric and Ice Plants Co., Inc. of its ice plant assets to Tacloban Ice Plant, Inc. in exchange for the latter's shares of stock give rise to the recognition of gain or loss? "2. Does the distribution by Tacloban Electric and Ice Plants Co., Inc. of its Tacloban Ice Plant shares proportionately to its stockholders in exchange for its own shares give rise to the recognition of gain or loss to its stockholders?" In reply, I have the honor to inform you that, pursuant to Section 35(c)(2) of the Tax Code, as amended by R.A. No. 4522, the transfer of the ice plant assets to Tacloban Ice Plant, Inc. in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss to Tacloban Electric and Ice Plants Co., Inc. The subsequent distribution of Tacloban Ice Plant, Inc. shares by Tacloban Electric and Ice Plants Co., Inc. to its shareholders in exchange for its own shares shall not also give rise to the recognition of gain or loss to the stockholders, such exchange being also within the ambit of the non-recognition of gain or loss provisions of Section 35(c)(2) of the Tax Code. It may be stated, however, that the basis to the stockholders of the Tacloban Ice Plant, Inc. shares that will be distributed to them shall be the same as their basis of the Tacloban Electric and Ice Plants Co., Inc. shares that they shall surrender in exchange therefor. It may be stated further that Tacloban Electric and Ice Plants Co., Inc. must file with its income tax return for the taxable year in which the reorganization will be consummated a statement of all facts pertaining to the reorganization including 1. A description of the assets transferred together with a statement of the cost or other bases thereof adjusted to the date of transfer; and cdtech 2. The kind and number of shares of each class received. Tacloban Ice Plant, Inc. must also file with its income tax return 1. A complete description of all the assets received from Tacloban Electric and Ice Plants Co., Inc.; 2. A statement of the cost or other bases thereof in the hands of the transferor adjusted to the date of transfer; 3. The total issued capital stock and outstanding capital stock immediately prior to and immediately after the exchange, with a complete description of each class of stock; 4. The classes of stock and number of shares issued to the transferor; and 5. The fair market value of the capital stock as of the date of exchange. Furthermore, every stockholder who shall received a distribution of stock of Tacloban Ice Plant, Inc. shall attach to their returns for the year in which the distribution is received a statement which shall include a description of the stock they surrendered and received and the names and addresses of the corporations involved in the reorganization. Finally, permanent records in substantial form shall be kept by all parties involved in the reorganization showing the information listed above. cdta Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5