BIR Ruling

January 26, 1970 Mr. Antonio C. Pacis Sarmiento Bldg., Ayala Avenue Makati, Rizal S i r : This refers to your letter dated January 16, 1970 requesting a ruling as to the tax consequence of a transaction described as follows: It is represented that your clients, Feliciano S. Sarmiento, Lorenzo S. Sarmiento, Pablo S. Sarmiento, Danilo P. Sarmiento and Feliciano P. Sarmiento, Jr. (hereinafter referred to as the Transferors) are stockholders of three Sarmiento Trading firms namely, the Empire Electronics Corporation, Sartres Corporation and Audio Empire, Inc. The Sarmiento Securities Corporation (hereinafter referred to as the Transferee) is an operating, holding and service company. It is the plan of the transferors to assign to the transferee, as the Parent company majority ownership and/or working control over the three trading firms and manage them as subsidiaries. The transferors proposed to transfer their entire shareholdings in the three trading firms to the transferee corporation in exchange for the stocks of the latter. As a result of the exchange the transferors would gain control of the transferee corporation by owning 79.25% of the total voting power of the stocks entitled to vote. In reply thereto, I have the honor to inform you that pursuant to Section 35 paragraph c (2) 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 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. The term "control" shall mean ownership of stocks in a corporation possessing at least fifty-one (51%) per cent of the total voting powers of all classes of stocks entitled to vote. Accordingly, no gain or loss shall be recognized on the transfer of the entire shareholdings of your clients in the three trading firms in exchange for the shares of stock of the transferee corporation. 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 the transfer; (2) The kind of stock received and preference if any; (3) The number of shares of each class received; (4) The fair market value per share of each class at the time 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: acd (1) A complete description of all property received from the transferor; (2) A statement of the original acquisition cost or other basis thereof in the hands of the transferor and the 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 complete description of each class of stock; (b) the classes of stock and number of shares issued to the transferor in the exchange; (c) the fair market value of the capital stock as of the date of the 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 stock received in the exchange. cd Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue