BIR Ruling

December 14, 1970 Mr. Manuel Miranda No. 6 U. E. Tech University Hills Subdivision Caloocan City S i r : This refers to your letter dated November 16, 1970 requesting information as to whether or not the following transactions be subject to capital gains tax: "A, B, and C are minority stockholders of "X" corporation, who separated from "X" corporation and invested the proceeds from the disposition of their investment in "X" corporation in "Y" corporation. "A, B and C received from "X" corporation, in exchange of their "X" shares of stocks operating and other depreciable assets, which A, B, and C immediately delivered and transferred to "Y" corporation and in exchange for which, A, B, and C received "Y" corporations shares of stocks. "The stockholdings of A, B, and C in "X" corporation consists of their original shares and stock dividends accumulated in more than fifteen (15) years. "At the completion of the said transaction, the stockholdings of A, B, and C in "X" corporation is now replaced by shares of stocks in "Y" corporation at a value very much greater than the acquisition cost to A, B, and C of their investment in shares of stocks in "Y" corporation." In reply thereto, I have the honor to inform you that the transaction between the stockholders and X corporation is an exchange transaction because the former are disposing of their shares in exchange for "operating and other depreciable assets". The other transaction between the said stockholder and Y corporation is also an exchange transaction because the former are transferring said assets in exchange for shares of stocks. In both transactions, the properties received in exchange are essentially different from the properties disposed of. (Sec. 140, Revenue Regulations No. 2). The gain derived by stockholders from the foregoing transactions are subject to income tax pursuant to Section 35(c)(1) of the Tax Code they being not one of the exceptions provided in Section 35(c)(2) of the same Code. For ready reference, these provisions are quoted as follows: "(c) Exchange of property "(1) General rule . Except as herein provided upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized. "(2) Exceptions . No gain or loss shall be recognized if in the pursuance of a plan of merger or consolidation (a) a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation, (b) a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation, also a party to the merger or consolidation, or (c) a security holder of a corporation which is a party to the merger or consolidation exchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation. 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. (As amended by Sec. 1, Republic Act No. 4522.) For income tax purposes, the income derived shall be determined in accordance with Section 141 of Revenue Regulations No. 2 which provides: "Section 141. Determination of gain or loss from the exchange of property . The amount of income derived or loss sustained from an exchange of property is the difference between the market value of the property received in exchange and the original cost, or other basis, of the property exchanged. If the property exchanged was acquired prior to March 1, 1913, see Sections 136 and 137 of the regulation." cdt Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue