Tax Consequence of the Proposed Transfer of Shares of Stock

April 6, 1987 BIR RULING NO. 098-87 35-c-2-c 149-81 098-87 Gentlemen : This refers to your letters dated February 23 and March 3, 1987 requesting a ruling on the tax consequence of the proposed transfer of shares of stock of CFC Corporation (CFC) and Universal Robina Corporation (URC) in exchange for the shares of stock of an investment corporation to be organized by CFC & URC. It is represented that CFC and URC are domestic corporations duly organized and existing under the laws of the Philippines, that they have investments in several other domestic corporations, that 40% of the shares of stock of the investment corporation will be listed in the stock exchange and the 60% will be retained by CFC and URC; that as initial capital of the corporation, the investments in unlisted shares of stock of CFC & URC will be contributed to the corporation at book value in exchange for its shares of stock; and that after the transfer, CFC and URC will gain control of the corporation to the extent of 60% of its capital stock. 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 P.D. 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 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 percent (51%) of the total voting power of all classes of stocks entitled to vote. 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 CFC and URC of its unlisted shares of stock in exchange for the shares of stock of the investment corporation considering that as a result of the said exchange, the transferors will gain control of the transferee 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 therefore, and that cost basis to the transferee of the properties exchanged for stocks shall be the same as it would be in the hands of the transferors. (Section 35(c)(5)(a) and (b), Tax Code as amended by Presidential Decree 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 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 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 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 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 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. aisadc Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner