BIR Ruling No. 209-82

July 8, 1982 BIR RULING NO. 209-82 035-c 218-81 209-82 Mr. Eduardo B. Evangelista 113 R. Tirona Street B.F. Homes, Paraaque Metro Manila S i r : This refers to your letter dated December 3, 1981 requesting a ruling on the tax consequence of the contemplated transfer of the real properties which you and your wife Epifania C. Evangelista owned in exchange for shares of stock of Embassy Farms, Inc. cdta It appears that Embassy Farms, Inc. which was incorporated on November 4, 1981 has a capital stock of five million (P5,000,000.00) pesos divided into 50,000 shares with a par value of One Hundred Pesos (P100.00) each share; that the following are the incorporators of the corporation, with the number of shares subscribed and paid-up, viz: No. of Shares Amount Amount Names Subscribed Subscribed Paid Eduardo B. Evangelista 10,900 P1,090,000.00 P272,500.00 Epifania C. Evangelista 1,000 100,000.00 25,0000.00 Angel L. Santos, Jr. 200 20,000.00 5,000.00 Amado C. Martin 200 20,000.00 5,000.00 Teofilo J. Mesina 200 20,000.00 5,000.00 12,500 P1,250,000.00 P312,500.00 ==== ========= ======== that spouses Eduardo C. Evangelista and Epifania Cruz Evangelista intend to assign/transfer their eleven (11) parcels of land, all located at Loma de Gato, Marilao, Bulacan in exchange for shares of stock of Embassy Farms, Inc. cdti 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 the transfer of eleven (11) parcels of land by the spouses Eduardo B. Evangelista and Epifania Cruz Evangelista in exchange for the shares of stock of Embassy Farms, Inc. considering that after the exchange and as a result of said exchange, the transferors who are already the majority stockholders of the Embassy Farms, Inc. will gain further control by owning 96% of the entire capital stock of the latter 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 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)(5)(a) and (b), NIRC as amended by PD 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 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 stock 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 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. Very truly yours, RUBEN B. ANCHETA Acting Commissioner