BIR Ruling

June 28, 1973 Messrs. Joaquin Cunanan & Co. Certified Public Accountants 8th Floor, Rufino Bldg. 6784 Ayala Ave., Makati, Rizal Gentlemen : This is in reply to the letter dated February 13, 1973 of your client, Mr. Federico B. Vigano, requesting information on the tax consequence of the following transaction "We would like to make an inquiry regarding the aspect on the transfer of assets from a single proprietorship to a corporation. "Dumoy Carpentry Shop was a single proprietorship owned by Mr. and Mrs. Federico Vigano of Dumoy Toril, Davao City. The Company was incorporated last January, 1973 and a transfer of assets is contemplated at the moment. "Would the transfer of assets at book value be subject to tax? If subject to tax, what are the pertinent tax provisions? Similarly, if the transfer of assets is made at revalued basis (replacement cost less appropriate depreciation), will the transfer be subject to tax? If so, what are the pertinent provisions?" In your letter dated June 18, 1973, you furnished additional informations that: (1) there was five incorporators; (2) the subscribed capital stock is P200,000; and (3) the authorized capital stock is P1,000,000. This office is made to believe from the foregoing representations that the transfer of assets from the single proprietorship to the corporation is in exchange for shares of stock in order that the owner-transferor of said assets gains control of the corporation; otherwise the transaction is taxable in accordance with Section 35(c)(1) of the Tax Code as implemented by Section 141 of Income Tax Regulations, based on 100% of the gain, irrespective, of whether the transfer of the assets is for book value or appraised value. Pursuant to Section 35(C)(2)(2) of the Tax Code as amended by Republic Act No. 4522, no gain or loss shall be recognized if a person exchange 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. Accordingly, no gain or loss shall be recognized on the transfer of said assets in exchange for the shares of stock of the newly organized corporation adverted to in the query is the transferor subsequently gains control of the transferee 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. In connection with the exchange here involved, 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: (1) A description of the property transferred, or of his interest in such property, together with a statement of original acquisition cost or 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: (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 company 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 the 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 stock received in exchange. cdtech Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR"