BIR Ruling

October 28, 1969 Mr. Demetrio S. dela Paz Marikina, Rizal S i r : This refers to your letter dated October 1, 1969 requesting a ruling on the tax consequence of a transaction to be effected as follows : cdt "xxx xxx xxx "I, together with my wife, Milagros dela Paz and the spouses Amador and Teresa Cabal, contemplate to organize a corporation to be known as the TEREMIL SUBDIVISION, INC., to engage in business as subdivision owners and to sell residential lots on cash or in terms, payable within ten years. "To accomplish the purpose of the corporation, we wish to transfer to it solely for and in exchange for stocks therein two (2) parcels of land located at Antipolo, Rizal and covered by Transfer Certificates of Title Nos. 233964 and 241413 of the Registry of Deeds of Rizal. Subsequent to its incorporation, the four of us will gain control, owning more than sixty (60%) per centum of all the stocks of the said corporation. We are well aware of the legal effects of the proposed transaction and by way of a query, we would like to be informed of the tax consequence thereof, if any." 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 exchange 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 services shall not be considered as issued in return for property. Accordingly, no gain or loss shall be recognized on the contemplated transfer of the two (2) parcels of land covered by Transfer Certificates of Title Nos. 233964 and 241413 of the Registry of Deeds of Rizal in exchange for shares of stock of the corporation adverted to in your query, it appearing that you and your wife together with the spouses Amador and Teresa Cabal 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. 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 the 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 capitals 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; and (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 stocks received in the exchange. LibLex Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue