BIR Ruling

February 27, 1976 A. B. Aluquin & Associates ABA Building 3308 Zapote Street Makati, Rizal Attention: Mr . Amando B . Aluquin Gentlemen : This refers to your letter dated November 27, 1975 requesting ruling as to the tax consequence of the transfers of certain properties described hereunder as follows: cdtech "Our client, H. Jocson, organized a corporation to absorb the assets and liabilities of his business which has been operating under a single proprietorship. Out of the subscription to the capital stock of the corporation of P100,000.00, Mr. Jocson owns 93% or P93,000.00 out of which he paid the initial minimum requirement of P23,250.00. After the approval by the Securities and Exchange Commission, he transferred to the corporation in exchange for the shares of stock a portion of the properties of his business under the single proprietorship in the sum of P69,750.00 to pay in full his subscription. However, in view of the fact that the total properties of his original business after appraisal by an independent appraiser, was valued at P139,500.00, there remains a balance in the value of his properties in the sum of P69,750.00. In order that the full value of the properties may be transferred to the corporation, the corporation requested for an increase in the authorized capital stock to P1,000,000.00 and after having paid the initial minimum requirement on the increased capital stock in the same percentage and proportion as the original incorporation, the remaining value of the properties of Mr. H. Jocson was subsequently transferred to the corporation in exchange for the corporate shares of stock. At all times, Mr. Jocson has continuously been in control of the corporation, having remained majority stockholder. 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. The term "control" shall mean ownership of stocks in a corporation possessing at least fifty-one (51%) per cent of the total voting power of all classes of stocks entitled to vote. aisadc Accordingly, no gain or loss shall be recognized on the first transfer by your client, Mr. H. Jocson of a portion of his single proprietorship's assets and liabilities worth P69,750.00 in exchange for the shares of stock of a corporation organized for the purpose, among others, of receiving and absorbing all of such assets and liabilities, considering that as a result of the said exchange, Mr. Jocson gains control of the transferee corporation. It should be understood, however, that if Mr. Jocson later sells or exchanges the shares of stock acquired by him in the exchange, he shall be subject to income tax on the gains derived from such exchange or sale, and the cost basis of said shares of stock shall be the same as the original acquisition cost or adjusted cost basis to Mr. Jocson of the property exchanged therefore. (see Sec. 35(c)(4), Tax Code) The subsequent transfer by Mr. Jocson of his properties or assets, also worth P69,750.00, in exchange for shares of stock of the corporation already controlled by him, is a transfer which obviously will result in his gaining further control of the said corporation. Such being the case, no gain or loss shall be recognized on the aforementioned transfer. In this connection, you are further advised that 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 or property and shall not prevent the exchange from being within the exception in accordance with Section 35(3)(c) of the Tax Code. However, if the total liabilities to be assumed by the transferee corporation exceed the original or acquisition cost of the property transferred, as hereunder illustrated Mortgage assumed by corporation P60,000.00 Less Acquisition Cost P50,000.00 Excess of liability over cost P10,000.00 ======== the P10,000.00 excess shall be recognized as gain of the transferor. On the bases of the facts and figures, the cost basis of the property received by the transferee corporation in exchange for its shares of stock shall be P60,000.00 (original cost of property, plus gain recognized to the transferor) in accordance with Section 35(4)(a) and (b) of the National Internal Revenue Code; while the cost basis of the shares of stock exchanged for said property shall be zero, computed as follows: Acquisition cost of property P50,000.00 Plus gain recognized P10,000.00 Total cost P60,000.00 Less mortgage assumed by transferee P60,000.00 000000000 You are further advised that in order that your client can avail of the non-recognition of gain provided for in Section 35(c)(2)(c) of the Tax Code, as amended, he and the transferee corporation must file with their income tax returns for the taxable year in which the exchange was consummated a complete statement of facts pertinent to the exchange. The statement of the transferor (Mr. Jocson), should include the following information 1. A description of the property transferred together with a statement of the original acquisition cost or other basis thereof at the time of the 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 exchange. The transferee corporation should include the following in the statement to be filed with its income tax return 1. A complete description of all property received from the transferor; 2. A statement of the original acquisition cost or other basis of the property in the hands of the transferor and the adjusted cost basis thereof at the time of the transfer; 3. Information on 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 of each class of stock; (b) The classes of stock and number of shares issued to the transferor in the exchange; and (c) The fair market value of the capital stock issued to the transferor as of the date of exchange. In addition to the foregoing requirements, permanent records in substantial form must be kept by each party to the exchange, which should show the information hereinabove listed. cdt Very truly yours, CONRADO P. DIAZ Acting Commissioner of Internal Revenue TAN-1182-568-4 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."