BIR Ruling

March 5, 1970 Atty. F.G. De Guzman 107 Sta. Teresita St. Bo. Kapitolyo, Pasig, Rizal S i r : This refers to your letter dated February 27, 1970 requesting information as to whether or not the exchanges which are described below are subject to income and gift taxes. cdt Your clients, Messrs. J. Y. Campos and M. K. Tan, entered into an agreement with International Resources Limited on October 29, 1968 whereby they purchased 3,142.858 voting common shares of stock of Marcopper Mining Corporation for the total consideration of $10 million. Under the terms of the agreement, your clients made a down payment of P3,931,210.00 (equivalent of $1 million) and the balance of $9 million was evidenced by promissory notes payable on demand. Pursuant also to the agreement, your clients will now organize a corporation which will hold the aforementioned shares. Messrs. Campos and Tan's rights, interest and obligations under the agreement will be contributed to the capital stock of the corporation in exchange for the shares of stock of the new corporation. The transfer value of such property rights to the new corporation shall be the acquisition cost of P3,931,210.00 for which the corresponding number of shares of the new corporation shall be issued. Thereafter, the corporation shall hold the Marcopper shares and also assume all the obligations under the agreement. After the organization of the corporation, your clients will sell a major part or all of their shares in the new corporation to a third party also at par value. It is pointed out that the foregoing transactions will be undertaken on sound business considerations. Your clients would like to be released or to limit their liability under the agreement with International Resources Limited in view of CB circular No. 289 which provides for a new floating foreign exchange system, considering that their obligation under the agreement being payable in US dollars, they do not want to be continually exposed to the risk of foreign exchange fluctuation. By the foregoing contemplated transfers, your clients may be able to minimize their losses, if any, and further prevent any other adverse effects. You now pose the following questions: (1) Whether or not the transfer by your clients of their rights, interests and obligations on the Marcopper shares under the agreement with International Resources Limited to a corporation to be organized in exchange for the shares of stock of such corporation is subject to income tax. (2) Whether or not the sale of the shares of stock of the new corporation by your clients at their acquisition cost or at par value is subject to income tax or gift taxes. In reply, I have the honor to inform you as follows: The transfer of the property rights and obligations of your clients under the aforementioned agreement at acquisition cost to a corporation to be organized in exchange for the latter's shares of stock of equal value will not give rise to any income tax consequence, there being no gain actually to be realized. This transaction is a mere act of incorporating the ownership of one's individual ownership of property. Besides, this transaction may be covered by Section 35(c) (2) of the Tax Code, as amended by R. A. 4522 which provides, viz.: ". . . 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." The subsequent sale by your clients of a major part or all of their shares in the new corporation to a third party also at cost or par value thereof will not also give rise to any income tax consequence, there being also no gain actually realized. Neither will the transaction be subject to the gift taxes as the sale will actually be made at full and adequate consideration. Considering the proximity of the dates when all the foregoing transactions are to be executed, no substantial increase in the fair market value of the Marcopper shares may arise, if any, and should there be, this Office believes that the increase will be offset by the risk that they seek to avoid under the operations of the floating foreign exchange rate system. Accordingly, all the exchanges and disposition of Marcopper shares of stock as hereinabove indicated will not give rise to any income nor gift tax consequence. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue