Section 34 (c) (2) and (6) (c) of the Tax Code Merely Defers Recognition of the Gain or Loss from Exchange of Properties for, in Determining Gain or Loss from a Subsequent Transaction of Real Properties or of Stocks Involved in the Exchange, the Original or Historical Cost of the Properties or the Stocks is Considered; Thus, Subsequent Sale or Exchange Thereof shall be Subject to Income Tax on Gains

March 7, 1996 BIR RULING NO. 038-96 34 (c) (2) & (6) (c) 6-96 038-96 Flores, Duran & Associates 2nd Floor, Dona Yolanda Bldg. 7165-A Marcelo Avenue, Marcelo Green Village Paraaque, Metro Manila Attention: Atty . Romeo H . Duran Gentlemen : This refers to your letter dated February 20, 1996 requesting confirmation of BIR Ruling No. UN-006-96 dated January 2, 1996 to the effect that "In reply thereto, please be informed that your opinion is hereby confirmed. LLphil Section 34 (c) (2) and (6) (c) of the Tax Code merely defers recognition of the gain or loss from the exchange of properties for in determining the gain or loss from a subsequent transaction of the real 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/stockholder will later sell or exchange 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. 34 (c) (5) (a) and (b), Tax Code, as amended by P.D. No. 1773) Accordingly, the basis for purposes of determining YIC's gain from the sale of its RPDI shares shall be the historical/original acquisition cost or adjusted basis to YIC of its real property (building) exchanged for the RPDI shares. Such being the case, the capital gains realized by YIC and the individual stockholders of RPDI from the sale of all their shareholdings in RPDI consisting of unlisted 13,320 shares which were acquired from a tax-deferred exchange of properties, to the tenants/lessees of the aforesaid building shall be subject to a tax of 10% if the capital gain is not over P100,000 and 20% if the capital gain is over P100,000 pursuant to Sections 24 (a) (2) (A) and 21 (d) (1) both of the Tax Code, as amended. [BIR Ruling No. 163-90 dated August 27, 1990; BIR Ruling No. 221-91 dated October 31, 1991] The tax shall be paid by the seller-stockholders." In reply thereto, please be informed that the aforementioned BIR Ruling No. UN-006-96 dated January 6, 1996 is hereby confirmed. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue