BIR Ruling No. 022-80

October 14, 1980 BIR RULING NO. 022-80 035-c2c 063-80 22-80 Atty. Dante Q. Barbosa Rm. 400-A Madrigal Building Ayala Avenue Makati, Metro Manila S i r : This refers to your letter dated April 10, 1980 requesting a ruling on the tax consequence of a transaction described as follows: "R.S. Roque Shipping Co., Inc., a corporation organized under the laws of the Philippines, was originally incorporated with an authorized capital stock of FIVE HUNDRED THOUSAND PESOS (P500,000.00) and said capital stock was divided into FIFTY THOUSAND SHARES of the par value of TEN PESOS (P10.00) per share. cdta Of the aforesaid capital stock, the following persons subscribed and paid for their subscriptions, to wit: Name No. of Amount of Amount Paid Shares Subscription on Subscription 1. Romeo S. Roque 5,000 P50,000.00 P12,500.00 2. Teresita D. Roque 4,000 40,000.00 10,000.00 3. Severino Araullo 500 5,000.00 1,250.00 4. Romulo Serdea 300 3,000.00 750.00 5. Francisco M. Simeon 200 2,000.00 500.00 On 10 November 1979, to meet the increasing demands of its business, 50% of the entire corporate capital stock subscribed, present and voting, of R.S. Roque Shipping Co., Inc., unanimously approved to increase the authorized capital stock from Five Hundred Thousand Pesos to TEN MILLION (P10,000,000.00), divided into One Million Shares with a par value of TEN PESOS (P10.00) per share. Of the aforesaid increase capitalization, amounting to P9,500,000 following persons subscribed and paid for their subscriptions, to wit: Name No. of Amount of Amount Paid Shares Subscription on Subscription 1. Romeo S. Roque 178,000 P1,780,000 P472,000.00 2. Teresita D. Roque 12,000 120,000 30,000.00 3. Severino Araullo None 4. Romulo Serdea None 5. Francisco M. Simeon None To pay his subscription of P472,000.00, Romeo S. Roque transferred, by way of assignment, a parcel of land, duly registered under the Torrens System as Transfer Certificate of Title No. 18651, with the Registry of Cagayan de Oro City, in exchange for shares of stock of R.S. Roque Shipping Co., Inc. The Deed of Assignment is hereto attached as Annex "A" hereof and made as integral part hereof. Also attached as Annexes "B" and "C", respectively, are the appraisal of the true market value of the land and the latest tax declaration of the same. By virtue of such subscriptions and payments, Atty. Romeo S. Roque gained effective control of the R.S. Roque Shipping Co., Inc.." 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. Accordingly, no gain or loss shall be recognized on the transfer of the aforementioned parcel of land in exchange for the shares of stock of R.S. Roque Shipping Co., Inc., it appearing that after the exchange Atty. Romeo S. Roque will gain control of the transferee-corporation by owning even more than 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 or the stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by him in the exchange, he 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 transferor of the property exchanged therefor; and that the cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferor. (Sec. 35(c)(4), NIRC) No gift tax is payable under the abovementioned transaction, nor is the transferee corporation 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 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 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 the 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 a 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 taxpayers 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. cdti Very truly yours, ROMULO M. VILLA Acting Commissioner