BIR Ruling

December 23, 1974 Mr. Clemente J. Celso Certified Public Accountant 662 Guillermo Street Gagalangin, Manila S i r : This has reference to your letter dated November 7, 1974 stating as follows: "1. The Philippine Umbrellas Factory, hereinafter referred to as the Partnership, is a registered general co-partnership, with Messrs. George Chua and Philip Chua as partners. "2. The Philippine Umbrella Factory, Inc., hereinafter referred to as the Corporation, is a domestic corporation duly registered with the Securities and Exchange Commission. Messrs. George Chua and Philip Chua together with wives owned 98% of the authorized capital stocks of the said corporation. aisa dc "3. The corporation will acquire the assets of the Partnership and assumed its liabilities, and in exchange therefor will issue shares of stocks to the latter with par value much greater than the net asset value (book value of assets transferred less liabilities assumed), as a result of the appraisal of the land, the buildings and the machineries." From the foregoing facts, you now request this Office to rule on whether "the partners of the Partnership be exempted from income tax in the exchange of its assets and liabilities for shares of stocks of the Corporation, even if the par value of the shares received in the exchange exceed the book value of the net assets transferred." 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 the partnership exchanges its property solely for stock in the corporation controlled by the partners, the corporation assuming the liabilities of the partnership. " Incorporations and transfers to controlled corporations . 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 stock 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." (33 Am. Jur. 2d 572) In connection with the exchange herein involved, 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 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 the transfer; (2) The kind of stock received and preference if any; cdt (3) The number of shares of each class received; (4) The fair market value per share of each class at the time 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 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 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 the 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 the exchange. cdta Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN 1601-593-5 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATION TO THE BIR."