BIR Ruling

May 10, 1976 Mr. Jose A. Cacho President, Carmelo & Bauermann, Inc. P.O. Box 665, Manila S i r : This refers to your letter dated December 3, 1975 requesting for a ruling on the tax consequence of the proposed re-organization of Carmelo & Bauermann, Inc. casia It is represented that Carmelo & Bauermann, Inc. (Carmelo, for short) is a domestic corporation created in 1914 under the laws of the Philippines, to engage primarily in the business of printing, publishing and other related activities and of leasing of real estate; that as of June 30, 1975, Carmelo had an authorized capital stock of P4,000,000 divided into 400,000 shares with a par value of P10.00 each, of which 208,870 shares with an issued value of P2,088,700 are issued and outstanding; that based on the unaudited financial statements of Carmelo for the six months ended June 30, 1975, it has total assets of P17,144,025 against current liabilities of P1,805,462, unrealized gain on installment sale of land of P3,517,977 and stockholders' equity of P11,790,586, including revaluation surplus of P9,060,555; that an appraisal of the sound value of the machinery and equipment of Carmelo listed in Schedule A hereof made by Asian Appraisers (Philippines), Inc. the sound value of such assets as of October 8, 1974 was P9,193.00; other assets pertaining to Carmelo's printing operations amounted to P1,861,107 as of June 30, 1975; that as contemplated in the re-organization plan, a new company called the New Printing Company (NPC) will be organized to engage primarily in the publishing and printing business, more particularly, NPC will continue the printing operations of Carmelo; that NPC will be formed by the transfer by Carmelo of its assets; that these assets and liabilities are connected with the printing operations of Carmelo; that the transfer will be made solely in exchange for the shares of stock of NPC and the name Carmelo & Bauermann, Inc. will also be transferred to, and carried by NPC; that NPC will have an authorized capital stock of Forty Million Pesos (P40,000,000) divide into 400,000 shares with a par value of P100 each; and that NPC will, therefore, be a wholly-owned subsidiary of Carmelo. Specifically, the proposed plan of re-organization will be substantially as follows: "1) Carmelo will transfer and assign, together with the liabilities connected with the printing operations amounting to P1,587,398 (See Schedule C), the assets listed in Schedules A and B hereof at a total value of P11,054,107. These assets will be transferred net of the above liabilities. The net transfer value of the assets will, therefore, be P9,466,709, as summarized in Schedule D. Solely in exchange therefor, NPC will issue to Carmelo 94,667 of its shares of stock with a par value of P100 each, or a total issued value of P9,466,700. "2) Any excess of total appraised value, if any, of the net assets transferred over the total par value of NPC shares issued to Carmelo will be treated as paid-in surplus in the books of NPC. "3) The above figures are based on the unaudited financial statements of Carmelo for a six-month period ended June 30, 1975 and may change depending upon the completion of the audit of Carmelo's operations for the calendar year ending December 31, 1975. However, basically, the assets and liabilities to be transferred to NPC are those connected with Carmelo's printing operations." In reply, I have honor to inform you that the above-described corporate re-organization comes within the purview of Section 35(c) (2) of the Tax Code, as amended by Republic Act No. 4522, which provides "No gain or loss shall also 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." cdt In accordance with the aforequoted law neither Carmelo nor NPC shall be subject to income tax as a result of the exchange. And since the assets are exchanged for stocks of equal value, neither of the parties are subject to donor's gift tax. Nor is NPC subject to the stock transaction tax imposed by Republic Act No. 6141, as amended, the stocks involved in the transaction being original issues. (See Section 4(1), Republic Act No. 6141) It should be emphasized, however, the 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 assets or of the stocks involved in the exchange, the original or historical cost of the assets or the stocks is considered. Thus the basis of the NPC stocks received by Carmelo shall be the same as the basis of the net assets exchanged therefor; and the basis of the assets transferred in the hands of NPC shall be the same as it would be in hands of Carmelo. (Section 35(c) (4) of the Tax Code). 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 all property received from the transferor corporation; (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 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 corporations 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. cdi 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."