Tax Consequence of Proposed Transaction

December 13, 1979 BIR RULING NO. 125-79 Tax consequence of proposed transaction This refers to your letter dated August 30, 1977 requesting a ruling as to the tax consequences of the proposed transactions of your clients, namely: Mr. Domingo M. Guevara, Sr., Mrs. Carmen S. Guevara, Mr. Reynaldo S. Guevara, Mr. Domingo S. Guevara, Jr. and Mr. Ricardo S. Guevara, described as follows: Stockholders No. of Shares % Group I Domingo 21,320 2.99 Carmen 2,913 .41 Reynaldo 104,341 14.62 Domingo 103,578 14.51 Ricardo 62,950 8.82 Sub-Total 295,102 41.35 Group II Petronilo 121,336 17.00 Carmen 61.755 8.65 Celia 62,044 8.69 Roberto 60,609 8.49 Benjamin 62,407 8.74 ABC Foundation, Inc. 28,000 3.92 ABC Trust Fund 21,630 3.03 Henry 109) Emilio 109) Victoria 109) Celso 109) .08 Alan 104) Rafael 104) Manuel 109) Sub-Total 418,534 58.63 Grand Total 713,636 99.98%" "2. Stockholders under Group I personally own real and personal properties with an aggregate market value of P20,784,735.96 (ANNEX A) which they intend to swap with 186,702 shares of stock of X & Y (MEDEZA & SONS) Corporation. "3. The valuation of the real and personal properties is the market value as appraised by an independent, licensed appraiser; the shares at Book value, based on latest audited statements. The valuation of the X & Y (MEDEZA & SONS) Corp. shares is also book value (since shares are not listed in stock exchanges) as per audited financial statements as of March 31, 1977. cdt "4. X & Y (MEDEZA & SONS) Corp. has an authorized capital stock of P100 M of which P71,363,600 is fully paid. It has a par value of P100 per share and a book value of P111,325 as of March 31, 1977. "5. The resulting change in capital stock structure after the swap of properties for X & Y (MEDEZA & SONS) Corp. stock is shown in ANNEX B, showing Group I in control of 481,804 shares of X & Y (MEDEZA & SONS) Corp. which is 53.51% of the total paid-up capital." cdt The transferors in the abovementioned transaction shall be subject to the donor's gift tax on the difference, if any, between the fair market value of the properties transferred and the shares of stock exchanged therefor. It may be stated that the amount of P20,784,735.96 fixed on the real and personal properties transferred represents the appraised value, while the same amount fixed on the share of stocks exchanged therefor represents the book value thereof. The transferee corporation is not subject to the stock transaction tax imposed by Republic Act No. 6141, as amended, the stocks involved in the transaction being original issues. 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, no gain or loss shall be recognized if a person exchanges his property for stock in a corporation of which as result of such exchange said person alone or together with other 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. Accordingly, no gain or loss shall be recognized on the transfer of your clients' properties in exchange for shares of stock of X & Y (X & Y & SONS) Corporation, it appearing that after the exchange your clients will gain control of the corporation by owning 53.51% of the total voting power of all classes of stocks 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 properties or of the stocks involved in the exchange, the original or historical cost of the properties or the stocks is considered. Thus, if your clients 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, and the cost basis of the shares of stock shall be the same as the original acquisition cost or adjusted cost basis to your clients of the properties exchanged therefor; and the cost basis of the properties transferred in the hands of X & Y (MEDEZA & SONS) Corporation shall be the same as it would be in the hands of your clients. (Section 35-(c)(4) of the Tax Code) 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 returns 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 interest 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 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: cd (1) A complete description of all property received from the transferors; (2) A statement of the original acquisition cost or other basis thereof in the hands of the transferors and the adjusted cost basis at the time of the transfer; (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 of the capital stock as of the date of exchange which was 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. All said requirements should be complied with; otherwise, the exchange shall not be considered an exempt transaction within the purview of Section 35(c) of the Tax Code.