BIR Ruling

June 27, 1966 Araneta, Mendoza & Papa Counsellors-at-Law A & T Building 955 Muelle del Banco Nacional Gentlemen : This refers to your letter dated June 20, 1966 requesting for a ruling on whether or not gain or loss which may result in the exchange or not gain or loss which may result in the exchange of a piece of urban real property with a fair market value of approximately P2,500,000.00 for a similar urban real estate having a fair market value of P2,500,000.00 and located in the same locality will be recognized for income tax purposes. In reply thereto, I have the honor to inform you that under Section 35(c) of the Tax Code, as amended by Republic Acts Nos. 1921 and 4522, all exchanges or property are taxable except in cases of merger and consolidation or when a taxpayer exchanges his property for stock in a corporation in certain cases. While the exchange represented does not fall within the exceptions, nevertheless, pursuant to Section 140 of the Income Tax Regulations, gain or loss from the acquisition and subsequent disposition of property is realized only when as a result of a transaction between the owner and another person the property is converted into other property that is essentially different from the property disposed of and that has a market value. In other words, in order that income may be considered realized, there must be a change in substance and not merely in form and a change into the equivalent of cash. (U.S. Reg. 45(1920 Ed.) Art. 1563; Par. 20.07, Vol. 3, Mertens) As there is no change in substance of the properties involved in the exchange, this Office believes as it hereby holds that the exchange will not give rise to the recognition of gain or loss. It may be stated in this connection, however, that if in addition to the properties exchanged cash is also received by one party to the exchange to make up for the difference in market value of the properties exchanged such cash shall be taxable to the party receiving as it would be to him actual profit partially realized. aisadc Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue