BIR Ruling

August 29, 1967 Mr. Francisco P. Monge Eastern Paper Mills Co., Ltd. 3rd Floor, Phil. Bar Assn. Bldg. Corner Aduana and Arzobispo Streets Intramuros, Manila S i r : This refers to your letter dated July 31, 1967 requesting legal opinion on a query stated as follows: "1) Would the conversion of a partnership into a corporation fall within the purview of the exceptions enumerated in paragraph (2), subsection (c) of Section 35, in a case where the partners will receive shares of stock in the new corporation in exchange for property or assets of the partnership transferred to said corporation in the same proportion as their respective capital holdings in the partnership? "2) If so, may we now transfer the assets of the partnership to the corporation at reappraised values (upward reappraisal) without resulting in the realization of capital gains to the partners?" In reply thereto, I have the honor to inform you as follows: Republic Act No. 4522 covers transfers of properties for stocks of controlled corporations. Transfers to controlled corporations related principally to the organization of a corporation; for example, in the incorporation of an individual proprietorship or a partnership. However, the property may be transferred to a previously existing corporation. (Par. 9510, P-H, Vol. 2). Your corporation may, therefore, incorporate under the provisions of R.A. 4522 provided that any such incorporation meets the requirements of the law. Incident to incorporations under R. A. No. 4522, the following rules must be complied with: "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: cdpr (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 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; (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 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; prcd (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; prll 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. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue