BIR Ruling

October 9, 1974 Mr. Rodrigo Coloso 1085 Don Pedro St. Singalong, Manila S i r : This refers to your letter dated July 9, 1974 requesting advice on the tax consequences that would result under the following facts: ". . . A is a minority stockholder of a close corporation controlled by his family (wife and children) to the extent of 99%. To bolster the capital position of the corporation, he decided to assign into the corporation the spouse's conjugal land which they bought in 1940 at P10,000. To increase the capitalization of the corporation, he decided to have the land appraised by an independent appraiser who appraised the said land at P100,000. The Security and Exchange Commission accepted the P100,000 valuation and so A and his wife were issued shares of stock worth P100,000 in exchange of the land acquired by the corporation. In the assignment and/or exchange, no money was involved and as a result A and his wife became the controlling interest in the corporation." On the basis of the foregoing facts you posed the following queries: "(1) Under the circumstances above stated, is there taxable income on the part of the spouse's on the difference between the acquisition price of P10,000 and the SEC accepted valuation of P100,000? "(2) Suppose A and his wife divided the P100,000 shares a stock into four (4) shares of P25,000, placing P50,000 in the name of their children who were before not member of the corporation and in so doing, the four (4) of them (A, wife and 2 children) became the controlling stockholders of the corporation, will the two (2) children have to pay any tax as a result of this land transfer to the corporation?" In reply thereto, I have the honor to inform you as follows: The transfer or assignment of the conjugal property consisting of land owned by A and his wife in exchange for shares of stock worth P100,000.00 of the corporation is not subject to the capital gains tax pursuant to Section 35 paragraph (c) of the Tax Code, as amended by Republic Act No. 4522, which provides that 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 power of all classes of stocks entitled to vote. If A and his wife divide the P100,000.00 worth of shares of stock into four (4) parts of P25,000.00 each and place P50,000.00 worth of stock in the name of their two children as a result of which the spouse's and their children become the controlling stockholders of the corporation, the children are not subject to income tax nor to the donee's tax, but the parents, as donors of P50,000.00 worth of stock in favor of the two children, are subject to the donor's tax under Section 109 of the Tax Code, as amended by Presidential Decree No. 69. In order that the abovementioned exchange can be considered within the purview of Section 35(c) of the Tax Code, the transferors must file with their income tax return for the taxable year in which the exchange was consummated a complete statement of all facts pertinent of 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 of other basis thereof at the time of 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 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 the following: (1) A complete description of all property received from the transferors; (2) A statement of the original acquisition cost or other basis thereof in the hands of the transferors and the adjusted cost basis at the time of 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 transferors in the exchange; (c) The fair market value of the capital stock as of the date of exchange which was issued to the transferors; In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers participating in the exchange, showing the information listed above. All said requirements should be complied with, otherwise, the exchange shall not be considered an exempt transaction within the purview of Section 35(c) of the Tax Code. cdt Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5