Tax Consequence of the Transfer of the Real Properties

January 15, 1981 BIR RULING NO. 010-81 035-c 2-c 22-80 010-81 Mr. Benjamin G. Sabater Rm. 317 Victoria Bldg. 11th Avenue, Grace Park Caloocan, Metro Manila Gentlemen : This refers to your letters dated October 2 and November 26, 1980 requesting a ruling on the tax consequence of the transfer of the real properties of your client, Mr. Lim Tang for shares of stock of the Solid Parts Corporation. It is represented that your client has a total stockholdings of 15,000 shares of the total outstanding capital stock of the corporation; and that with the said exchange and subsequent increase in the authorized capital stock of the corporation your client will now have a total stockholdings of 155,000 shares worth P1,550,000 or 70.4% of the total outstanding capital stock of the corporation. cdti In reply thereto, I have the honor to inform you that pursuant to Section 35 paragraph (c)(2)(c) of the Tax Code as amended by Republic Act No. 4522, no gain or loss shall be recognized if a person exchanges 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. The term "control" shall mean ownership of stocks in the corporation possessing at least fifty-one (51%) percent of the total voting power of all classes of stocks entitled to vote. Accordingly, no gain or loss shall be recognized on the transfer of the property of Mr. Lim Tang in exchange for shares of stock of Solid Parts Corporation, it appearing that after the exchange Mr. Lim Tang will gain control of the corporation by owning at least 51% of the total voting power of all classes of stocks entitled to vote. It should be emphasized, however, that Section 35(c)(2)(c) of the Tax Code merely defers recognition of gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties of the stocks is considered. Thus, if the transferors later sell or exchange the shares of stock acquired by them in the exchange, they shall be subject to income tax on the gains derived from such sale or exchange, taking into consideration that the cost basis of the shares of stock shall be the same as the original acquisition cost or adjusted cost basis to the transferors of the properties exchanged therefor; and that the cost basis to the transferee of the properties exchanged for stock shall be the same as it would be in the hands of the transferors. (Section 35(c)(4) of the Tax Code). In this connection, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gain provided for in Section 35(c)(2)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned. (a) The transferors must file with their income tax returns 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 their respective 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 all property received from its transferors; (2) A statement of the original acquisition cost or other basis thereof in the hands of the transferors and the adjusted cost basis at the time of the transfer; (3) Information with respect to the capital stock of the corporation, including: (i) The total issued and outstanding capital stock immediately prior to and immediately after the exchange, with a complete description of each class of stock; (ii) The classes of stock and number of shares issued to the transferors in the exchange; and (iii) The fair market value of the capital stock as of the date of exchange which was issued to the transferors. In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers participating in the exchange, showing the information listed above. All said requirements should be complied with; otherwise, the exchange shall not be considered an exempt transaction within the purview of Section 35(c) of the Tax Code. cdta As regards the depreciation of the improvements on the land exchanged Section 30(f)(1) of the Tax Code as amended provides a reasonable allowance for deterioration of property arising out of its use or employment in the business or trade or out of its not being used. Very truly yours, RUBEN B. ANCHETA Acting Commissioner