Transferee Corporation Can Depreciate Agricultural Assets Based on Total Par Value of Shares It Issued in the Exchange

February 7, 1984 BIR RULING NO. 030-84 30-f 000-00 030-84 Gentlemen : This refers to your letter dated January 16, 1984 stating that your client, Philippine Cocoa Corporation (Goya) is contemplating to transfer its agricultural assets to a corporation to be formed, in exchange for the latter's shares of stock, as result of which Goya will own at least 51% of the outstanding shares of the new corporation; that sometime after the said exchange, Goya will sell at par, a portion of the shares it received from such exchange to outside parties and will, notwithstanding such sale, continue to own at least 51% of the total voting power of the new corporation; that Goya will pay whatever tax is due on the gain realized from the sale of a portion of its shareholdings in the new corporation; and that the new transferee corporation intends to depreciate the agricultural assets it received from Goya on the basis of the total par value of the shares it issued in the exchange. Based on the foregoing representation, you request confirmation of your opinion to the effect that the new (transferee) corporation can depreciate the assets on the basis of its cost which is the aggregate of the par value of the shares it issued to Goya in the exchange. In reply, I have the honor to inform you that under Section 30(f)(1) of the Tax Code, a deduction from gross income for depreciation is allowed but limits the recovery to the capital invested in the assets being depreciated . The law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges not matters of right. They are not created by implication but upon clear expression of the law. (Basilan Estates, Inc. vs. Commissioner, G.R. No. L-22492, September 5, 1967) In this case, the actual capital investment recoverable by the transferee corporation through depreciation allowance is an amount equal to at least the par value of the stocks issued by said corporation to the transferor in exchange for the latter's assets. It may be stated that one of the sources of capital of a corporation is issuance of stock, the consideration of which may be "property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued." (Sec. 62, Corporation Code of the Philippines) Thus, for the purpose of a depreciation allowance, where a lone stockholder liquidated a corporation and its assets were transferred to the stockholders in cancellation and redemption of the corporation's entire issued and outstanding capital stock in the hands of said stockholder, the latter was entitled to a stepped-up basis of the assets. (BIR Ruling No. 147-83 dated August 10, 1983) Moreover, if real property is exchanged with stocks in a corporation, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax due on the Deed of Exchange. (BIR Ruling Nos. 109-82 and 004-83) For the foregoing reasons, this Office hereby confirms your opinion that the transferee corporation in this case can depreciate the agricultural assets on the basis of the total par value of the shares it issued to Goya in the exchange. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner