BIR Ruling No. 244-82

September 7, 1982 BIR RULING NO. 244-82 35-c-2c 000-76 244-82 Atty. Emmanuel G. Cochico Suite 211, JCS Building 119 De la Rosa cor. Alvarado St. Legaspi Village, Makati Metro Manila S i r : This refers to your letter dated July 26, 1982 requesting a ruling on the tax consequence of the transfer of certain real properties by your clients, Mrs. Demetria S. Cojuangco and her six (6) children, namely: Pedro Cojuangco, Josephine C. Reyes, Teresita C. Lopa, Corazon C. Aquino, Jose Cojuangco, Jr. and Paz C. Teopaco, in exchange for 213,612 common shares of the capital stock of J.C. Enterprises, Inc. cdti It is represented that J. C. Enterprises, Inc. is a domestic corporation duly organized and existing under the laws of the Philippines; that in order to expand its business operations, the corporation increased, with the approval of the Securities and Exchange Commission, its authorized capital stock to P30,000,000.00 divided into 300,000 common shares with a par value of P100.00 per share, P23,675,000.00 of which, or 236,750 shares, still remain unsubscribed and unissued; that as of December 31, 1981, the transferors' stockholdings in the transferee corporation, which include their subscriptions to the increase in capital stock are as follows: Number Name of Shares Par Value 1. Demetria S. Cojuangco 9,130 P 913,000.00 2. Pedro Cojuangco 8,705 870,500.00 3. Josephine C. Reyes 8,705 870,500.00 4. Teresita C. Lopa 8,705 870,500.00 5. Corazon C. Aquino 8,705 870,500.00 6. Jose Cojuangco, Jr. 8,705 870,500.00 7. Paz C. Teopaco 8,705 870,500.00 8. Estate of Jose Cojuangco 1,890 189,000.00 Total 63,250 P 6,325,000.00 ====== =========== that on March 17, 1982, Mrs. Demetria S. Cojuangco and her six (6) children executed a Deed of Assignment and Conveyance of several parcels of land having an aggregate fair market value of approximately P21,361,200.00 and located in Metro Manila, Baguio City, Pangasinan, Rizal and Batangas which they own in common, in exchange for the said corporation's 213,612 common shares with a par value of P100.00 per share; that after the full implementation of such Deed of Assignment and Conveyance, the stockholdings of the transferors in the transferee corporation shall be as follows: Name No. of Shares Par Value Demetria S. Cojuangco 115,936 P 11,593,600.00 Pedro Cojuangco 26,506 2,650,600.00 Josephine C. Reyes 26,506 2,650,600.00 Teresita C. Lopa 26,506 2,650,600.00 Corazon C. Aquino 26,506 2,650,600.00 Jose Cojuangco, Jr. 26,506 2,650,600.00 Paz C. Teopaco 26,506 2,650,600.00 Estate of Jose Cojuangco 1,890 189,000.00 276,862 P27,686,200.00 ====== ============ and that after the exchange, and as a result of such exchange, the transferors Mrs. Demetria S. Cojuangco, and any four (4) of her children who are already in control of the transferee corporation will maintain or gain further control thereof by owning shares of stock possessing more than 51% of the total voting power of all classes of stocks entitled to vote in the corporation. 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, 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. 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 seven (7) transferor-co-owners, Mrs. Demetria S. Cojuangco and her six (6) children aforenamed, and the transferee corporation, J. C. Enterprises, Inc., considering that after the exchange and as a result of the said exchange not more than five (5) of the transferors will maintain and 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 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 interests 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 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. cd Very truly yours, TOMAS C. TOLEDO Acting Commissioner