BIR Ruling No. 064-80

December 22, 1980 BIR RULING NO. 064-80 035-c2c 22-80 64-80 Lee, Sevilla & Co. R-705 Enterprise Bldg. Quintin Paredes Street Metro Manila Attention : Mr . Andres A . Lee, Jr . Gentlemen: This refers to your letter dated December 3, 1980 requesting a ruling on the tax consequence of the transfer of the properties of your clients Rural and Urban Enterprises, Inc. and Mr. David I. Luison in exchange for shares of stock of the Metal Lux Industries, Inc. It is represented that the Rural and Urban Enterprises, Inc. a real estate dealer of residential and industrial lots acquired several parcels of land in Tagaytay City with an estimated present market value ranging from P50.00 to P30.00 per square meter; that Mr. David I. Luison is an owner of a factory building in Quezon City with a present value of P500,000.00; that your clients will transfer their aforesaid properties in exchange for shares of stock of Metal Lux Industries, Inc.; and that after the exchange the transferors, Rural and Urban Enterprises and Mr. David I. Luison will gain control of the corporation by owning more than 50% of the total voting power of all classes of stocks entitled to vote. In reply thereto, I have honor to inform you that pursuant to Section 35 paragraph (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 the corporation possessing at least fifty-one (51%) percent of the total voting power of all classes of stocks entitled to vote. cdti Accordingly, no gain or loss shall be recognized on the transfer of the properties of Rural and Urban Enterprises, Inc. and Mr. David I. Luison in exchange for shares of stock of Metal Lux Industries, Inc., it appearing that after the exchange the transferors will gain control of the corporation by owning more than 50% 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 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 properties exchanged for stock shall be the same as it would be in the hands of the transferors. (Section 35(c)(4) of the Tax Code.) In this connection, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gain 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 returns 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 respective 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 all 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: (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 transferors in the exchange; and (c) 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 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. Very truly yours, RUBEN B. ANCHETA Acting Commissioner