BIR Ruling No. 306-82

December 2, 1982 BIR RULING NO. 306-82 35-c-2-c 000-77 306-82 Carlos J. Valdes & Co. Certified Public Accountants CJVC Building, Aguirre St. Legaspi Village, Makati Metro Manila Attention: Atty . Ernesto S . Taino, Jr . Gentlemen : This refers to your letter dated November 4, 1982 requesting confirmation of your opinion on the following: cdti "1. That under the provisions of Section 35(c)(2) of the Tax Code, as amended, the acquisition cost of the property to be exchanged for shares of stocks of a corporation may be used, instead of its fair market value, provided that the exchange would result in gaining further control of the subject corporation. "2. That the difference between the acquisition cost and the fair market value of the property to be transferred in exchange for shares of a corporation is not subject to donor's tax under the tax-free exchange scheme embodied in Section 35(c)(2) of the Tax Code, as amended. "3. That the transaction as hereinbelow described is a tax-free exchange under Section 35(c)(2) of the Tax Code, as amended." It is represented that by virtue of a Deed of Assignment executed on December 17, 1981, your client, Maria Cacho transferred certain parcels of land together with their improvements located in Mandaluyong, Metro Manila and in Baguio City covered by TCT Nos. 473902 and 23903, respectively, to Calle Real Development Corporation (hereinafter referred to as the corporation) in exchange for the corporation's 2,922 shares worth P292,200.00 at a par value of P100.00 per share; that the total acquisition costs of the Mandaluyong and Baguio properties, together with their improvements are P161,969.00 and P130,292.00, respectively, or a total of P292,261.00 while their total fair market values are P917,170.00 and P885,620.00, respectively; that the corporation was incorporated with an authorized capital stock of P5,000,000.00, divided into 50,000 shares with a par value of P100.00 per share; that the following are the incorporators of the corporation with the number of shares subscribed and paid up, viz: Number of Amount Amount Name Shares Subscribed Paid-Up 1. Maria Cacho 7,767 P776,700 P194,175 2. Demetria C. Vidal 734 73,400 18,350 3. Francisco Cacho 184 18,400 4,600 4. Jose Antonio Cacho 184 18,400 4,600 5. Alfonso Cacho 184 18,400 4,600 6. Ana Maria C. de Oteyza 105 10,500 2,625 7. Jose Ma. E. Cacho 105 10,500 2,625 8. Ma. Teresa C. de Arnaiz 105 10,500 2,625 9. Manuel E. Cacho 105 10,500 2,625 10. Ma. Rosa E. Cacho 105 10,500 2,625 11. Ma. Dulce C. Fernandez 105 10,500 2,625 12. Mariano E. Cacho, Jr. 105 10,500 2,625 13. Mariles Cacho Romulo 46 4,600 1,150 14. Marilou Cacho Soriano 46 4,600 1,150 15. Lourdes Hernandez 30 3,000 750 16. Julio Hernandez 30 3,000 750 17. Rosario Hernandez 30 3,000 750 18. Gabriel Hernandez, Jr. 30 3,000 750 Total 10,000 P1,000,000 P250,000 ===== ========= ======= and that after the exchange, and as a result of such exchange, the transferor Maria Cacho, who is already in control of the transferee corporation will maintain or gain further control thereof by owning more than 51% of the outstanding capital stock of the corporation. cdta 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. Accordingly, irrespective of whether the real properties adverted to in your inquiry were to be transferred on the basis of their acquisition costs or fair market values, no gain or loss shall be recognized on the said transfer of properties by your client in exchange for the 2,922 shares of the transferee corporation, considering that after the exchange and as a result of such exchange, she gained further control of the transferee corporation . Likewise, no gift tax is payable and due from Maria Cacho and the Calle Real Development Corporation on the aforesaid exchange of properties. 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. No. 1773) cdt 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 transferor must file her 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 her 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 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