BIR Ruling No. 210-83

November 28, 1983 BIR RULING NO. 210-83 S i r : This refers to your letter dated August 26, 1983 requesting a ruling on the tax consequence of the transfer of certain real properties by Mrs. Paz Alcaraz and her five (5) children, namely: Angelina P. Alcaraz-Bayan, Arturo P. Alcaraz, Asuncion P. Alcaraz-Talon, Aurora P. Alcaraz and Conrado P. Alcaraz, in exchange for 154,840 shares of capital stock of Alpin Corporation. cdt It is represented that the Alpin-Corporation will be incorporated as a domestic corporation with total authorized capital stock divided into a single class of 290,000 no par-value shares all entitled to vote; that in exchange for the real properties to be transferred to the corporation the transferors-incorporators will own a total of 154,840 shares in the transferee corporation, distributed as follows: Name Number of Fair Market Value of Shares Real Property Exchanged 1. Paz P. Alcaraz 145,540 P921,000 2. Angelina P. Alcaraz-Bayan 1,860 16,800 3. Arturo P. Alcaraz 1,860 16,800 4. Asuncion P. Alcaraz-Talon 1,860 16,800 5. Aurora P. Alcaraz 1,869 16,800 6. Conrado P. Alcaraz 1,860 16,800 TOTAL 154,840 P1,005,000 ====== ======== and that the stockholding of Mrs. Paz P. Alcaraz together with those of any four (4) of the five (5) children will total 152,980 shares, representing more than 52.75% of all voting shares. In reply thereto, I have the honor to inform you that pursuant to Section 35(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, gain 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. The statutory requirement that " said person, alone or together with others, not exceeding four persons, gains control of said corporation " shall be understood to mean that any number of persons may exchange property for stocks provided that, as a result of the transaction, not more than five transferors, would control the corporation . Accordingly, no gain or loss shall be recognized to each of the six (6) transferors, Mrs. Paz P. Alcaraz and her five (5) children aforenamed and the transferee corporation, Alpin Corporation, considering that after the exchange and as a result of the said exchange not more than five (5) of the transferors 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 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 P.D. 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 properties transferred, or of their respective interest 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 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 stock/properties received in the exchange. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner Bureau of Internal Revenue