BIR Ruling

February 16, 1976 Ilocos Norte Electric Company Third Floor, Life Theater Bldg. Rizal Street, Laoag City Attention: Mr . Adramelec S . Monroy Vice-President Gentlemen : I have the honor to inform you that the ruling adverted to in your letter dated May 12, 1975 is still valid but with certain modifications. It is a well-settled jurisprudence that for gain to be taxable, such gain must be measurable gain, realized in a closed and completed transaction. There must therefore be an identifiable event which fixes the gain, and such event may be in the form of sale, exchange of property, payment of the taxpayers indebtedness or other profit realized from the completion of a transaction. Hence, mere economic gain or advances in the value of the property of a person or corporation in no sense constitutes the "income" specified in the revenue law. (see Fisher v. Trinidad, 43 Phil. 973 (1922) Such being the case, should the reappraised properties be subsequently sold and exchanged, the gain or loss from the sale or disposition thereof shall be determined by comparing the amount realized with the "basis" of the property to the taxpayer, "adjusted" to the date of sale. The "unadjusted" basis, then is the starting point for determining gain or loss. In the instant case, the basis of the aforesaid property is its original or acquisition cost to the taxpayer and not the reappraised value. The term "adjusted basis" means, in substance, the original capital investment ("unadjusted basis") adjusted to the date the taxpayer disposes of the property. (see par. 9935, p. 320 US Master Tax Guide (1969) ) However, pursuant to Section 35(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: Provided, that stocks issued for services shall not be considered as issued in return for property. The term "control" shall mean ownership of stocks in a corporation possessing at least fifty-one per cent (51%) of the total voting power of all classes of stocks entitled to vote. cdt Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."