Definition of the Term "Control"

July 13, 1989 BIR RULING NO. 150-89 34 (c) (2) (c) 000-00 150-89 S i r : In reply to your letter dated March 14, 1989, please be informed that the BIR Ruling, excerpt of which was reproduced in the column "Tax Case Digest" of the Manila Daily Bulletin issue of March 13, 1989 reading: "No gain or loss shall be recognized on the transfer of real properties of a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with shares of stocks of another domestic corporation to gain control of the latter corporation. The term 'control' shall mean ownership of stocks in a corporation possessing at least 51 percent of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stocks received, i.e., total subscribed, whether for property or for services by the transferor. In determining the 51 percent stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five. "However, Sec. 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 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. "Moreover, if a parcel of land is exchanged with stocks in a corporation, the value of which shall be the basis of the documentary stamp tax on the deed of exchange. Failure to affix the proper amount of documentary stamp to a document or instrument shall be subject to an additional amount of 25 percent of such unpaid amount which shall be in lieu of the interest prescribed in Sec. 240 of the Tax Code. "Finally, the certificates of stocks to be issued by the transferee corporation are, in all probability, original issues which are subject to the documentary stamp tax imposed under Sec. 175 of the same Code." is correct except for that portion on determination of control appearing in the first paragraph of the aforequoted ruling. Control is determined by the amount of stocks received, i.e., total subscribed, whether for property or for services by the transferor, although to the extent that the stock received is for services, the transferor is liable for income tax. (par. 2503.01, p. 31,012, Vol. 3A CCH (1986) Moreover, the said ruling is also applicable where the transferor of the real property is a natural person since the word "person" under Section 34(c)(2)(c) of the Tax Code, as amended, refers to both natural and juridical persons. cdt Very truly yours, (SGD.) JOSE U. ONG Commissioner