BIR Ruling

September 30, 1976 Taxability of Transfer of Real Property in Exchange of Share of Stocks This refers to your letter dated July 6, 1976 requesting a ruling in behalf of your client Mr. A.B.C. as to the tax consequence of a transaction described as follows: "Mr. A.B.C. at present owns 87.5% of the total outstanding stock of ABC Consulting and Management Corporation. The balance of the stock is held by four (4) other stockholders. It is the intention of Mr. A.B.C. to transfer to this corporation a parcel of land together with the improvements thereon in exchange for shares of stock. The property will be used by the corporation for its own purposes and to generate income. The property will be transferred at its current market value of P1,000,000.00 and Mr. A.B.C. will receive P1,000,000.00 worth of shares which shall give him further control of the corporation." In reply thereto, I have the honor to inform you that pursuant to Section 35(c)(2) of the Tax Code as amended by Republic Act No. 4522, no gain or loss shall be recognized if your client exchanges him property solely for stock in the A.B.C. Consulting and Management Corporation which is already controlled by the said transferer. " Incorporations and transfers to controlled corporation . When a sole proprietor or partnership decides to incorporate the business, the usual method is to transfer most or all the business assets to the newly-formed corporation in exchange for which the proprietor or partners take all of its stock or stocks and securities. Such an incorporation transfer and a transfer of property by one or more persons to their existing controlled corporation solely in exchange for stock or securities of the corporation both have the same general effect for tax purposes ." (Emphasis ours; 33 Am. Jur. 2d 572) It should be emphasized, however, that Section 35(c)(2) merely defers recognition of gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the property or of the stocks involved in the exchange, the original or historical cost of the property or the stocks is considered. Thus the basis of the stocks received by Mr. de Leon transfer shall be the same as the basis of the property exchanged therefor; and the basis of the property transferred in the hands of the ABC Consulting and Management Corporation shall be the same as it would be in the hands of Mr. de Leon transfer (Section 35(c)(4) of the Tax Code). cdtech In this connection, you are further advised that in order that the parties to the exchange can avail of the privilege provided for in Section 35(c)(2), as amended, they should comply with the requirements hereunder mentioned. (a) The transferor must file with its 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 its 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; and (4) The fair market value per share of each class at the date of the exchange. (b) 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 the property received from the transferor; (2) A statement of the original acquisition cost or other basis thereof in the hands of the transferee and 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 a complete description of each class of stock; (b) The classes of stock and number of shares issued to the transferor in the exchange; and (c) The fair market value of the capital stock as of the date of 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 stocks received in the exchange. cdtech