BIR Ruling

May 3, 1968 Mr. Demonthenes B. Gadioma P.O. Box 1115, Manila S i r : This refers to your letter dated April 29, 1968 requesting a ruling as to the tax consequence of a transaction described as follows: It is represented that your client, Mr. Ernest J. Klingler, a citizen of Switzerland and a resident of the Philippines for the last thirty years is engaged in the business of importing, direct and/or indent, industrial machinery and equipment of all kinds and description. He owns shares in some corporation engaged in mining. For the purpose of growth and expansion, he desires to incorporate his industrial machinery import business and throw some of his income producing mining shares of stock at market value into the capital structure of the corporation he plans to organize. The corporation has a capital stock of P7,500,000.00 divided into 75,000 shares of the par value of P100.00 per share. Your client would transfer his entire assets in his industrial machinery import business and his income producing mining shares of stock in exchange for P49,000 shares of the capital stock of the corporation. In reply thereto, I have the honor to inform you that pursuant to Section 35 paragraph 2(c) of the Tax Code as amended by R.A. 4522, no gain or loss shall be recognized if a person exchanges his property for stock in a corporation of which as result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation. The term "control" shall mean ownership of stocks in a corporation possessing at least fifty-one (51%) per cent of the total voting powers of all classes of stocks entitled to vote. Accordingly, no gain or less shall be recognized on the transfer of the assets of your client in his industrial machinery import business and of his income producing mining stocks in exchange for approximately 64% of the shares of stock of the corporation. In connection with the exchange herein 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 the original acquisition cost or other basis thereof and the adjusted cost basis at the time of transfers; (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; (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 stock received in exchange. lexlib Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue