BIR Ruling

May 25, 1977 Tax Consequence of Transfer of Assets in Exchange of Shares of Stocks This refers to your letter dated November 8, 1976 requesting a ruling in behalf of your client, Mrs. E. E. E., as to the tax consequence of the transfer of her assets, consisting of several parcels of agricultural land, together with the respective improvements, if any, to the Agricultural & Business Corporation, solely in exchange for the latter's shares of stock. In your aforesaid letter you made the following representations: "1. Capital Structure & Business of the Agricultural & Business Corporation "The AB Agricultural & Business Corporation was duly incorporated under Philippine laws on the 13th day of October 1976. The amount of the authorized capital stock of said corporation is P3 million, divided into 3,000,000 shares, at the par value of P1.00 per share, of which P600,000.00 has been subscribed and P187,500.00 paid-in, itemized as follows: Name Amount of Number of Amount Subscription Shares Paid-in xxx P260,000.00 260,000 P65,000.00 xxx 260,000.00 260,000 65,000.00 xx 25,000.00 25,000 25,000.00 xxx 25,000.00 25,000 25,000.00 xx 10,000.00 10,000 2,500.00 xx 10,000.00 10,000 2,500.00 xx 10,000.00 10,000 2,500.00 Total P600,000.00 600,000 P187,500.00 "It is represented that, from now up to the date of actual transfer of real estate properties as hereinafter described, there will be no substantial or material change in the ownership of the outstanding shares of stock. "The said corporation will engaged primarily in the business of owning, buying, acquiring, possessing, administering, developing, cultivating and/or otherwise dealing in agricultural lands and properties, and all the products thereof. xxx xxx xxx "The fair market values of the real properties to be transferred, as determined by the Government under P.D. No. 76, shall be the basis of the shares to be issued at their par values in AB Agricultural & Business Corporation, in exchange for the properties actually transferred." 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 R.A. 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. The term "control" shall mean ownership of stocks in a corporation possessing at least fifty-one (51%) percent of the total voting power of all classes of stocks entitled to vote. Accordingly, no gain or loss shall be recognized on the transfer of your client's properties in exchange for shares of stock of the AB Agricultural & Business Corporation it appearing that after the exchange your client together with four others will gain control of the corporation. In this connection, you are further advised that if pursuant to the exchange transaction, and as part of the consideration, the transferee corporation assumes the liability of the transferor or acquires from the transferor property subject to a liability, such assumed liability or liabilities shall not be treated as money or property and shall not prevent the exchange from being within the exception in accordance with Section 35(3)(c) of the Tax Code. However, if the total liabilities to be assumed by the transferee corporation exceed the original or acquisition cost of the property transferred, the excess shall be recognized as gain of the transferor. It should be emphasized, however, that Section 35(c)(2) merely defers recognition of gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the property or of the stocks involved in the exchange, the original or historical cost of the property or the stocks is considered. Thus, the basis of the stocks received by Mrs. E. E. E. shall be the same as the basis of the property exchanged therefore; and that the basis of the property transferred in the lands of the Agricultural & Business Corporation shall be the same as it would be in the hands of Mrs. E. E. E. (Section 35(c)(4) of the Tax Code.) The foregoing transactions involving the issuance and exchange of shares of stock are not subject to the stock transaction tax. (Sec. 195-B, Tax Code, as amended) The abovementioned transactions shall not be subject to the gift tax as the assets will be exchanged for shares having the same value. In this connection, you are further advised that in order that the parties to the exchange can avail of the privilege provided for in Section 35(c)(2), as amended, they should comply with the requirements hereunder mentioned. (a) The transferor must file with its 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 its interest in such property, together with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the 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. (b) On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the following: (1) A complete description of the property received from the transferor; (2) A statement of the original acquisition cost or other basis thereof in the hands of the transferee and adjusted cost basis at the time of the 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 issued to 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. aisadc