BIR Ruling

May 14, 1974 Recto Law Offices Suite-F, 5th Floor, Theo. H. Davies Bldg. Buendia Avenue, Makati, Rizal Attention: Atty . Rafael R . Recto Gentlemen : This refers to your letter dated May 13, 1974 stating as follows: "A, B, C, D, E, F & G are brothers and sisters and all stockholders of family corporation X, the latter having been organized in the 1930's. When said corporation X was organized, stockholders A, B, C, D, E, F, & G, in exchange of shares of stock in that corporation, placed real properties in the corporation as part of its assets. At that time, the aforementioned real properties were practically nil in value. Corporation "X" has never dealt in the buy and sale of real properties. Thus, the real properties brought into the corporation were never touched and never developed. In 1974, family corporation X, without liquidating itself, decided to redeem the shares of A, B, C, D, E, F & G with the very same properties that had been exchanged for them over 40 years ago. By this time the real properties had acquired a fair market value of P14,000,000 from an original acquisition value of say, P40,000." You now ask the following questions: "1. What are the capital gains taxes due, if any, on the redemption of the stockholder's shares by the family corporation X, using the very same properties? 2. Who pays for the taxes, the family corporation or each individual distributes? 3. How much will be the total taxes paid?" In reply, I have the honor to inform you as follows: The shares of stock paid by the brothers and sisters in corporation X are capital assets; and the redemption thereof by the corporation will give rise to capital gains. Each individual stockholder is liable to tax on the difference of the market value of that portion of the property he will receive and the acquisition cost of the shares he will surrender to the corporation. Thus the total gain derived by the stockholders shall be P14,000,000 (market value of property) less P40,000 (acquisition cost of their shares. However, considering that they held the shares for more than twelve months, only 50% of the gains they will derive shall be subject to tax. cdt Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5