BIR Ruling

November 15, 1972 Caparas, Ilagan & Masakayan Attorneys-At-Law P. O. Box 3776 Manila Gentlemen : This refers to your letter dated November 18, 1971 requesting a ruling on a query stated as follows: "In behalf of certain parties who have consulted us in the matter, we kindly request a ruling from your office on the qualification of the proposed transaction described below for the exemption from capital gains tax provided for in Section 35(c)(2) of the NIRC. cdt "Our clients are four brothers and sisters who are desirous of joining the real estate corporation organized last year by two other brothers of theirs. The plan of our client involves their proposal to the corporation to take stock subscriptions of its capital stock which subscriptions will be in equal amounts and to make initial payments on their respective subscriptions in the form of contributions of real property owned separately by the subscribers. "The proposed subscriptions, in the aggregate, will constitute more than 65% of the resulting outstanding issued and stock of the corporation, and will represent the same percentage of the voting power. Together, our clients, thus, will gain control of the corporation. Incidentally, the agreement among our clients is to make their respective initial payments with land equal in area. While the appraisals of these properties may result in their having different values, it is conservatively estimated nevertheless that each subscriber's property contribution will amount to and pay for at least 40% of his or her subscription." 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. The initial payments by your clients on their respective subscriptions in the form of contributions of real property separately owned by them, which proposed subscriptions, in the aggregate, will constitute more than 65% of the resulting outstanding and issued stock of the corporation to be owned by them, will result in their gaining control of the corporation and which situation clearly comes within the purview of Section 35 of the Tax Code, as amended by Republic Act No. 4522. In connection with the exchanges herein involved, your clients, who are the transferors, must file with their income tax returns 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 at the time 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 its income tax return for the taxable year in which the exchange was consummated: (1) A complete description of all property received from the transferors; (2) A statement of the original acquisition cost or other basis thereof in the hands of the transferors and the adjusted cost basis at the time 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 complete description of each class of stock (b) the classes of stock and number of shares issued to the transferors in the exchange; (c) the fair market value of the capital stock as of the date of exchange which was issued to the transferors. In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers participating in the exchange showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received in exchange. cd Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue