BIR Ruling

April 20, 1967 Mr. Romeo Malimban 6th Floor, Durano Bldg., Magallanes St., Manila S i r : This refers to your letter dated May 24, 1966 requesting information as to the tax consequence of a certain transaction described as follows: cdtech "A" acquired a piece of land in 1958 at the value of P50,000.00. Said piece of property, now worth P750,000.00 is contributed to a new corporation in exchange of shares of stock worth P750,000.00. Said new corporation will have a subscribed capital stock of P1,000,000.00. As a result of the transfer "A" acquired more than 51% of the voting power of the new corporation. Can the difference of P700,000.00 be considered not subject to recognition of gain under Sec. 35 of the Tax Code, as amended by R.A. 4522, approved in 1965?" In reply thereto, I have the honor to inform you as follows: Pursuant to Section 35 of the National Internal Revenue 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 ownerships 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. Consequently, if stockholder "A" referred to in your query, alone or together with others not exceeding four, gains control of the new corporation after the exchange, the difference or gain of P700,000.00 realized after said exchange will not be recognized. In connection with the exchange herein involved, Stockholder "A" 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 cost or other basis thereof, adjusted to the date 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; (5) If securities of the corporation are received, the principal amount and terms and the fair market value at the date of exchange; (6) The amount of money received, if any; and (7) If other property is received (a) a complete description of each separate item, and (b) the fair market value of each separate item at the date of 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 cdt (1) A complete description of all property received from the transferor; (2) A statement of the cost or other basis thereof in the hands of the transferors adjusted to the date 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 a complete description of each class of stock; (b) the classes of stock and number of shares issued to each transferor in the exchange and the number of shares of each class of stock owned by each transferor immediately prior to and immediately after the exchange; and (c) the fair market value of the capital stock as of the date of exchange which was issued to each transferor; (4) If securities are issued by the corporation, information on (a) the principal amount and terms of all securities outstanding immediately prior to and immediately after the exchange; cdll (b) the principal amount and terms of securities issued to each transferor in the exchange with a statement showing each transferor's holdings of securities of the corporation immediately prior to and immediately after the exchange; (c) the fair market value of the securities issued to the transferor on the date of the exchange; and (d) a statement as to whether the securities issued in the exchange are subordinated in any way to other claims against the corporation; (5) The amount of money, if any, which passed to each of the transferors in connection with the transaction; and (6) If other property passed to each transferor (a) a complete description of each separate item; and (b) the fair market value of each separate item at the date of exchange. In addition to the foregoing requirements, permanent records in substantial form must be kept by every 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 or securities and other property, if any, received in the exchange. llcd Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue