BIR Ruling No. 067-82

March 5, 1982 BIR RULING NO. 067-82 035-A-2 7-82 067-82 Romahaus Realty Corporation 339 Fordham Street Mandaluyong, Metro Manila Attention: Mr . Robert Uy President Gentlemen : This refers to your letter dated January 14, 1982 requesting a ruling on the tax consequence of the transfer of the real properties of Messrs. Robert Uy, Marina T. Uy and David T. Uy in exchange for shares of stock of Romahaus Realty Corporation. cdt It is presented that on December 8, 1981, a Deed of Absolute Exchange was executed by Messrs. Robert C. Uy, Marina T. Uy and David T. Uy transferring their real properties in exchange for shares of stock of Romahaus Realty Corporation, as follows: 1. Robert Uy a residential house and lot with a total area of 2,869 square meters located at 339 Fordham, Mandaluyong, Metro Manila valued at 2,800,000.00 in exchange for 28,000 shares of stock; 2. Marina T. Uy twelve (12) units of apartments (excluding lot) located at 275 J. A. Santos, San Juan, Metro Manila valued at P8,000.00 in exchange for 8,000 shares of stock; and 3. David T. Uy a residential house (excluding lot) located at 10 Jamaica, Merville Park, Paraaque, Metro Manila valued at P250,000.00 in exchange for 2,500 shares of stock. and that as a result of the said exchange, the aforesaid transferors gained control of the 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. 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. 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. cdtech Accordingly, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by the transferors of their real properties in exchange for shares of stock of Romahaus Corporation, considering that after the exchange and as a result of said exchange, the transferors gained control of 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 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 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)(5)(a) and (b), NIRC as amended by PD No. 1773) 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 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 properties transferred, or of their respective interests in such properties, 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 properties received from the transferors; (2) A statement of the original acquisition cost or other basis of the properties in the hands of the transferors and the adjusted cost basis hereof 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 stock 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 in 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 subsequent disposition of stocks/properties received in the exchange. Very truly yours, RUBEN B. ANCHETA Acting Commissioner