Transfer by Lyceum of Its Assets

August 6, 1981 BIR RULING NO. 149-81 035-c-2-c 10-81 149-81 Laurel Law Offices 8th Floor, Philbanking Bldg. 6797 Ayala Avenue Makati, Metro Manila Attention: Atty . Roberto P . Laurel Gentlemen : This refers to your letter dated April 28, 1981 requesting a ruling as to the tax consequence of the proposed transfer of the assets of Lyceum of the Philippines (Lyceum) for shares of stock of a development corporation. It is represented that the Lyceum, an educational institution with a book value of P12 million but with an appraised fair market value of P40 million intends to spin-off a development corporation using at least 80% of its assets as paid-up capital; that in return for the transfer of its assets consisting of real estate holdings, money market placements, listed and non-listed shares of stock, Lyceum will receive the equivalent value of shares of stock in the development corporation; and that after the exchange Lyceum will gain 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 Decree 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%) 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. aisadc Accordingly, no gain or loss shall be recognized both to the transferor and the transferee corporation, on the transfer by Lyceum of at least 80% of its assets consisting of real estate holdings, money market placements, listed and non-listed shares of stock, in exchange for the shares of stock of the development corporation, considering that as a result of the said exchange, Lyceum 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 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 interests 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: (i) The total issued and outstanding capital stock immediately prior to and immediately after the exchange, with a complete description of each class of stock; (ii) The classes of stock and number of shares issued to the transferors in the exchange; and (iii) 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 taxpayer participating in the exchange, showing the information listed above. All said requirements should be complied with; otherwise, the exchange shall not be considered an exempt transaction within the purview of Section 35(c) of the Tax Code. There is no time limitation for Lyceum to transfer its assets in exchange for shares of stock of the development corporation in order to avail of the benefits under Section 35(c) (2)(c) of the Tax Code. However, the transfer by Lyceum of its assets must be effected simultaneously with the issuance of the shares of stock of the development corporation in favor of Lyceum. Very truly yours, RUBEN B. ANCHETA Acting Commissioner