No Gain or Loss Recognized both to Transferors and Transferee Corporation on the Transfer of Shares of Stock

March 6, 1985 BIR RULING NO. 033-85 35 (c) (2) (c) 136-84 033-85 Gentlemen : This refers to your letter dated September 12, 1984 requesting a ruling as to whether or not the transfer of shares in six (6) corporations by the stockholders, namely: Brig. Gen. Hans M. Menzi (deceased), Messrs. Jose Y. Campos, Edgardo M. Cojuangco and Cesar C. Zalamea in exchange for the shares of your client, HM Holdings and Management, Inc. is subject to the capital gains tax prescribed under section 34(g) of the Tax Code as amended by Batas Pambansa Blg. 225 and as implemented by Revenue Regulations No. 2-82. Documentary evidence submitted shows that HM Holdings and Management, Inc. (HM Holdings) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) on January 20, 1982, owned by five (5) incorporators with an authorized capital stock of P1,000,000.00 divided into 100,000 shares with a par value of P10.00 each; that on June 26, 1984, SEC approved the increase of capital stock holdings from P1,000,000.00 to P100,000,000.00 divided into 10,000,000 shares with a par value of P10.00 each; that by virtue of a Deed of Transfer and Conveyance on August 17, 1983 the aforenamed stockholders transferred certain shares of stock in six other corporations, i.e., Liwayway Publishing Inc., Menzi & Co., Inc., Menzi Development Corporation, M & M Consolidated, Inc., Menzi Agricultural Corporation and Bulletin Publishing Corporation, in exchange for 6,000,000 shares of the authorized increased capital stock of HM Holdings in the amount of P100,000,000.00 with a par value of P10.00 each or P60,000,000.00 worth of shares, actually subscribed and paid up, viz: cdtech Name No. of shares Amount Hans M. Menzi 4,049,387 P40,493,870.00 Jose A. Campos 894,939 8,949,390.00 Eduardo M. Cojuangco 895,047 8,950,470.00 Cesar C. Zalamea 160,627 1,606,260.00 6,000,000 P60,000,000.00 ====== ========== In this connection, you contended that as a result of the said exchange, the transferors gained control of the transferee corporation. 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 and Presidential Decrees Nos. 1705 and 1773, no gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock in such 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 by possessing at least fifty-one (51%) percent of the total voting power of all classes of stocks entitled to vote. The term "property" shall be understood to include real property, tangible and intangible property, e.g., accounts receivable, stock or securities owned by the transferor or transferors. (see par. 3.03, p. 3-11, Federal Income Taxation of Corporations and Shareholders by Bittker & Eustice) Control is determined by the amount of stock received, i.e., subscribed and paid-up, whether for property or for services, by the transferor or transferors in determining the 51% stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by the late Brig. Gen. Hans M. Menzi, Messrs. Jose Y. Campos, Eduardo M. Cojuangco and Cesar C. Zalamea of their shares of stock in the abovementioned corporations in payment of their additional subscriptions for shares of stock of the increased authorized capital stock of the transferee HM Holdings, considering that after the exchange of property and as a result of the said exchange, the four (4) transferors will gain control of the transferee corporation by owing 60% of the total voting power of all classes of stocks entitled to vote of the latter corporation. 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 therefor; and that the cost basis to the transferee of the stocks exchanged for its stocks shall be the same as it would be in the hands of the transferors. (Section 35(c)(5)(a) & (b), Tax Code, as amended by Presidential Decree No. 1773). aisadc 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 properties transferred, or of their interest in such properties, together with the 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 corporations 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 properties (stocks, in this case) received from the transferors; 2. A statement of the original acquisition cost or other basis of the stocks in the hands of the transferors and the adjusted cost basis thereof at the time of the transfer; and 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 stocks and number of shares issued to the transferors in the exchange; and c. The fair market value as of the date of exchange of the capital stock 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 in order to facilitate the determination of gain or loss from a subsequent disposition of stocks/properties received in the exchange. cdti Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner