BIR Ruling No. 131-83

July 13, 1983 BIR RULING NO. 131-83 Gentlemen : This refers to your letter dated May 27, 1983 requesting a ruling on the tax consequence of the transfer of certain real properties by Messrs. Conrado M. Villamin and Hernan M. Montenegro in exchange for stocks of H.M. Montenegro and Associates, Inc. cdtech It is represented that H.M. Montenegro and Associates, Inc. is duly organized and existing under and by virtue of the laws of the Philippines; that its authorized capital stock has been increased from five hundred thousand (P500,000.00) pesos to ten million (P10,000,000.00) pesos divided into one hundred (P100.00) pesos per share; that of the entire amount of such increase of capital stock, two million five hundred thousand (P2,500,000.00) pesos worth of shares of stock had been subscribed; that on April 28, 1983, Messrs. Conrado M. Villamin and Hernan M. Montenegro transferred and conveyed to the corporation their real estate properties in partial payment of their subscriptions to the said increase in capital stock; and that after the exchange, and as a result of such exchange, the transferors, Messrs. Villamin and Montenegro will gain control of the corporation by owning 98.7% of the total capital stock 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 is 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%) per cent 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. Accordingly, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer of the properties of Messrs. Villamin and Montenegro in partial payment of their subscriptions considering that as a result of the said exchange, Messrs. Villamin and Montenegro will gain control of the corporation by owing 98.7% of the total capital stock of the 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 therefor; and that the 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) & (b) Tax Code as amended by P.D. 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 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 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 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 thereof at the time of the transfer; and (3) Information with respect to the capital stock of the corporation, including: (a) The total issued 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 stock/properties received in the exchange. cdta Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner Bureau of Internal Revenue