BIR Ruling No. 150-82

April 27, 1982 BIR RULING NO. 150-82 35-c-2c 7-82 150-82 Ms. Lutgarda Santiago Cifra 821 M. Naval Street Navotas, Metro Manila M a d a m : This refers to your letter dated February 18, 1982 requesting a ruling on the tax consequence of the transfer of your real property in exchange for shares of stock of L.S. Cifra Agro-Industrial, Inc. cdt It is represented that L.S. Cifra Agro-Industrial, Inc. is a corporation duly organized under the laws of the Philippines; that the authorized capital stock of said corporation is two million pesos (P2,000,000.00); that the amount actually subscribed is P1,248,000.00 of which P945,000.00 has actually been paid by you; and that on June 23, 1981 you executed a Deed of Assignment of your real property covered by Transfer Certificate of Title No. R-38873 in exchange for 4,920 shares of stock worth P492,000.00. 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. Accordingly, no gain or loss shall be recognized on your transfer of the aforementioned real property in exchange for shares of stock of L.S. Cifra Agro-Industrial Inc., it appearing that after the exchange and as a result of said exchange, you will gain further 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 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 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 transferors. (Section 35 (c) (5) (a) and (b), NIRC as amended by PD 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 transferor must file with her 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 property transferred, or of her 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 the property received from the transferor; (2) A statement of the original acquisition cost or other basis of the property in the hands of the transferor 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 transferor in the exchange; and (c) The fair market value as of the date of exchange of the capital stock issued to the transferor. 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/property received in the exchange. Very truly yours, RUBEN B. ANCHETA Acting Commissioner