BIR Ruling

July 14, 1977 Sycip, Gorres, Velayo & Co. P. O. Box 589, Manila Attention: Mr . B . V . Abela Tax Division Gentlemen : This refers to your letter dated October 6, 1976 requesting a ruling as to the tax consequence of the transfer by your client, International Harvester Macleod, Inc. of certain parcels of land to the Pasig Land Corporation solely in exchange for the latter's shares of stock. It is represented that International Harvester Macleod, Inc. (IHM) is a corporation organized under Philippine laws; that its principal stockholder is the International Harvester Co. of Chicago. Illinois, U.S.A.; that IHM is principally engaged in the manufacture and marketing of trucks and various farm and agricultural vehicles; that as a result of the expiration of the Laurel Langley Agreement, IHM is disqualified to own land in the Philippines; that the landholdings of IHM as of the termination of the Laurel-Langley Agreement are as follows: Location Area (sq. m.) Market Value Pasig, Rizal 46,470 P9,113,600.00 Manila 1,550 540,360.00 Bacolod City 6,000.00 1,080.000.00 P10,735,960.00 that the Pasig Land Corporation (PLC) was incorporated in May 1975 for the primary purpose of engaging in the business of owning and leasing real estate properties; that at the time of its incorporation, PLC had an authorized capital stock of P200,000 divided into 2,000 shares with a par value of P100 each, of which 400 shares have been subscribed and P10,000 have been paid up; that PLC was organized as an integral part of IHM's land divestment plan as submitted and approved by the Board of Investment; that the land divestment plan of IHM envisions the creation, of a realty company, 40% to be owned by IHM and 60% to be owned by the Filipino trustee of IHM's employee's pension fund, that IHM shall transfer its landholdings to PLC solely in exchange for the latter's shares of stock; that since the lands shall be transferred at their present market value which amounts to a total of P10,735,960, IHM shall be issued approximately 107,360 PLC shares at a par value of P100 per share; that together = with the above transfer by IHM, the Prudential Bank & Trust Company as the Filipino trustee of IHM's Employee's Pension Fund shall subscribe to 160,640 shares of PLC's capital stock having a total par value of P16,064,000; that out of said subscription, the bank shall pay in cash the amount of P1,606,400; and that PLC will increase its authorized capital stock to P30 million divided into 300,000 shares with a par value of P100 per share to cover the 268,000 shares to be issued to IHM and the trustee bank. 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 to your client, the International Harvester Macleod, Inc. on the exchange of its landholdings solely for shares of stock of the Pasig Land Corporation which together with the Prudential Bank and Trust Company, the Filipino trustee of IHM's Employee's Pension Fund will own more than 51% of the total voting power of all classes of stocks entitled to vote. 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 the International Harvester Macleod, Inc. shall be the same as the basis of the property exchanged therefor; and the basis of the property transferred in the hands of the Pasig Land Corporation shall be the same as it would be in the hands of International Harvester Macleod, Inc.(Section 35(c)(4) of the Tax Code) The foregoing transactions involving the issuance and exchange of shares of stock are not subject to the stock transaction tax, stocks transaction being original issues. (Sec. 195-B, Tax Code, as amended) The abovementioned transactions shall not be subject to the gift tax as the transferor will receive in exchange for the assets transferred by it, shares of stocks of equivalent value. 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 here under 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; (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. Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-P4519-F2828-8