Depreciation of the Agricultural Assets

April 25, 1989 BIR RULING NO. 083-89 29 (f) 000-00 083-89 Gentlemen : This refers to BIR Ruling No. 30-f-000-00-030-84 that was issued by this Office to you on January 7, 1984 confirming your opinion that the transferee corporation can depreciate the agricultural assets on the basis of their cost which is the aggregate of the par value of the shares it issued to Goya in a tax-free exchange transaction, described as follows: It was represented 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 a 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." In connection thereto, please be informed that after a restudy of the facts, applicable laws and jurisprudence on the issue involved in this case, this Office finds the aforecited ruling devoid of legal basis. Based on the foregoing representation, the agricultural assets were acquired by the transferee corporation in a tax-free transfer of property to a controlled corporation within the contemplation of then Section 35(c)(2)(c) (now Sec. 34(c)(2)(c) of the Tax Code as amended. This Office has consistently ruled that Section 34(c)(2)(c) of the Tax Code merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the property or of the stocks involved in the exchange, the original or historical cost of the property or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by it in the exchange, it shall be subject to income tax on 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 . [Section 34(c)(5)(a) and (b), Tax Code, as amended by Presidential Decree No. 1773] In other words, the property acquired by a transferee corporation "in connection with a reorganization" ordinarily takes a "carryover" basis equal to the transferor's basis, increased by any gain recognized to the transferor on such transfer. (par. 14.33, pp. 14-108, Bittker & Eustice' Federal Income Taxation of Corporations and Shareholders, 4th ed.) Under then Section 30(f)(1) (now Section 29(f)(1) of the Tax Code as amended, a deduction from gross income for depreciation is allowed but limits the recovery to the capital invested in the asset 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) For income tax purposes, an asset's depreciable basis, depreciation period, and salvage value must generally be known in order to compute the deductible depreciation allowance. Basis for depreciation is ordinarily the same as for determining gain on sale of the asset. The basis of depreciable property for purposes of depreciation is its adjusted basis for determining gain upon its subsequent sale or other disposition . (par. 5545, p. 244, 34 Am. Jur. 2d (1976)) In view thereof, this Office is of the opinion as it hereby holds that contrary to the aforecited ruling, the original acquisition cost or adjusted cost basis of the assets in the hands of the transferor is the basis of the depreciation allowance to be claimed by the transferee-corporation as well as for purposes of computing gain or loss in a subsequent disposition of the properties or stocks received as a consequence of the exchange. Accordingly, the capital sum (investment) recoverable by the transferee corporation through depreciation allowance is an amount equal to the historical cost or adjusted cost basis of the agricultural assets (to Goya) acquired from Goya in exchange for its stocks issued to Goya. cdtech This revokes BIR Ruling No. 30-f-000-00-030-84 dated January 7, 1984. Very truly yours, (SGD.) JOSE U. ONG Commissioner