BIR Ruling

September 24, 1973 Messrs. Joaquin Cunanan & Co. P. O. Box 2288, Manila Gentlemen : This refers to your letter dated August 8, 1973 requesting a ruling as to the tax consequence of a transaction described as follows: aisadc "All the six (6) children of Mr. Dalisay are the only incorporators-stockholders of a corporation engaged in real estate, logging, agriculture, manufacturing and related activities. They have subscribed to, and paid P400,000 out of the company's authorized capital stock of P1,000.000. "The corporation needs additional capital for expansion, so it is proposed that Mr. and Mrs. Dalisay would transfer their properties to the corporation in exchange for the 60% unsubscribed stock of the company. "The transfer of the assets of Mr. and Mrs. Dalisay for the unsubscribed portion of the company's capital stock would result in the control of the company by the couple or the two transferors." 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, gain control of said corporation. Accordingly, no gain or loss shall be recognized on the contemplated transfer of property by Mr. & Mrs. Dalisay in exchange for shares of stock of the corporation, it appearing that the former will subsequently gain 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. 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 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; On the other hand, the transferee corporation must file with the 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 cost or other basis thereof in the hands of the transferor 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 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. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5