BIR Ruling No. 229-82

July 30, 1982 BIR RULING NO. 229-82 035-c-2-c 22-80 229-82 Atty. Benjamin V. Ong 650 Padilla de los Reyes Bldg. 232 Juan Luna St., Manila S i r : This refers to your letter dated September 17, 1980 requesting a ruling on the tax consequence of the transfer of the property of your clients, the spouses Faustino and Kathryn Lim in exchange for 4,500 shares of stock of Ewan Corporation. It is represented that Ewan Corporation is a domestic corporation duly registered with the Securities and Exchange Commission; that it has an authorized capital stock of P5,000,000.00 divided into 50,000 common shares with a par value of P100.00 per share; that the amount actually subscribed is P1,000,000.00; that on September 10, 1980, the spouses Faustino and Kathryn Lim executed a Deed of Assignment of a parcel of land covered by Transfer Certificate of Title No. 239871 in exchange for 4,500 shares of stock of said corporation; that as of September 9, 1980, the spouses had a total stockholdings of 3,200 shares or 32% of the total outstanding capital stock of the corporation; and that after the said exchange, the spouses will now have a total stockholdings of 7,700 shares or 53.1034% of the total outstanding capital stock of the corporation. cdtech 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 No. 1703, 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 the corporation possessing at least fifty-one (51%) percent of the total voting power of all classes of stocks entitled to vote. Accordingly, no gain or loss shall be recognized on the transfer of the property of Mr. & Mrs. Faustino Lim in exchange for shares of stock of Ewan Corporation, it appearing that after the exchange the transferors will gain control of the corporation by owning 53.1034% of the total voting power of all classes of stock entitled to vote. 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 property or of the stocks involved in the exchange, the original or historical cost of the property or the stocks in 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 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)(4) of the Tax Code before amendment by P. D. 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 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 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 each class received; and (4) The fair market value per share of each class at the date of 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: cdt (1) A complete description of the property received from the transferors; (2) A statement of the original acquisition cost or other basis of the property 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 taxpayers participating in the exchange, showing the information listed above. All said requirements should be complied with in order to facilitate the determination of gain or loss from a subsequent disposition of the stocks/properties received in the exchange. Very truly yours, RUBEN B. ANCHETA Acting Commissioner