BIR Ruling

September 8, 1969 Messrs. Sycip, Gorres, Velayo & Co. P. O. Box 589, Manila Gentlemen : This refers to your request for a ruling, in behalf of Jaseco Manufacturing Co., Inc., P. O. Box 2307, Manila, on a query stated as follows: "One of our clients is a registered general co-partnership engaged in business as a manufacturer. The partnership is owned by two brothers who contemplate to incorporate the partnership under the Corporation Law. Under the plan, the partners will organize a new corporation to take over the manufacturing business of the partnership. The new corporation will be wholly-owned by the partners, except probably the qualifying shares. All the assets and liabilities of the partnership will be transferred to the new corporation at net book value or market value in exchange for shares of stock of the new corporation. The partnership will then be dissolved and the shares of stock received from the new corporation will be distributed to the partners in proportion to their respective interest in the partnership. The exchange of the property will be undertaken exclusively for the shares of stock of the new corporation and the interest of the partners will remain the same in the new corporation. "On the basis of the foregoing facts, our client has requested our opinion as to whether or not any gain or loss shall be recognized by the partners by reason of the exchange." 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 stocks in a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons gain control of said corporation provided that stocks issued for service shall not be considered as issued in return for property. Accordingly, no gain or loss shall be recognized on the contemplated transfer of property by the partnership in exchange for shares of stock of the corporation adverted to in your query, it appearing that the two brothers who are former partners in the partnership will subsequently gain control of said corporation. The term "control" means ownership of stocks in a corporation representing at least fifty-one per cent (51%) of the total voting power of all classes of stocks entitled to vote. LibLex In connection with the exchange herein involved, 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; and (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; and (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 a complete description 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. cdlex Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue