BIR Ruling No. 014-80

September 18, 1980 BIR RULING NO. 014-80 035-c2c 063-80 14-80 Mrs. Rufina A. Tiuseco Iriga City M a d a m : Reference is made to your letter dated July 8, 1980 requesting a ruling on the tax consequence of the assignment or transfer by you and your husband, Mr. Manuel S. Tiuseco of thirteen (13) parcels of land in exchange for shares of stock of Maruchil Development Corporation (Maruchil for short). It appears that by virtue of a Deed of Assignment executed on May 16, 1980, you and your husband transferred the aforesaid 13 parcels of land in partial payment of your subscriptions in the capital stock of Maruchil; and that as a result of the transfer, you and your husband gained control of Maruchil by owning more than 51% of its capital stock. In reply thereto, I have the honor to inform you that pursuant to Section 35(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 a corporation possessing at least fifty-one (51%) percent of the total voting power of all classes of stocks entitled to vote. cdt 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 or 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 therefore; and that the cost basis to the transferee of the properties exchanged for stocks shall be the same as it would be in the hands of the transferors. (Section 35(c)(4) of the Tax Code) No gift tax is payable by you, your husband and Maruchil on the aforesaid exchange of properties. Maruchil, the transferee corporation is not subject to the stock transaction tax imposed by Republic Act No. 6141, as amended, the stocks involved in the transaction being original issues. In this connection, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gains 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 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 their 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 reference, 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 the property received from the 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; (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 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 stocks received in the exchange. Very truly yours, RUBEN B. ANCHETA Acting Commissioner