BIR Ruling

June 25, 1970 Mr. M. A. Mozo 801 Enterprise Bldg. 524 Rosario St., Binondo Manila S i r : This refers to your letter dated June 15, 1970 requesting a ruling on a query stated as follows: "A group of persons are contemplating to form a corporation to engage in real estate buying and selling; that is, to buy big tracts of land, convert them into subdivision lots and sell them in installment basis to interested parties. The incorporators and initial stockholders and their corresponding stock subscriptions are as follows: Incorporator Stock Subscription A P500,000.00 B 100,000.00 C 20,000.00 D 10,000.00 E 10,000.00 P640,000.00 ========= "Except for A, all incorporators will fully pay their stock subscriptions in cash. Mr. A however, will entirely settle his subscription by conveying to the corporation, by way of assignment, a lot, the acquisition cost of which was P250,000 and the present market value approximately P500,000. "Under the case given above, will Mr. A be liable to pay the capital gains tax on the difference between the acquisition cost and present market value of the lot? Are the provisions of R.A. # 5422 (Exchange of Property for Stocks), specifically Sec. 1(2), applicable in this case?" 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 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 assignment by Mr. A of a lot the acquisition cost of which was P250,000 and the present market value approximately P500,000, in exchange for shares of stock of the corporation adverted to in your query, it appearing that Mr. A 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 a 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 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; 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. acd Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue