Amendment to NIRC Re: Exemption from Determination of Gain or Loss Any Exchange of Property for Stocks

June 19, 1965

REPUBLIC ACT NO. 4522

AN ACT EXEMPTING FROM DETERMINATION OF GAIN OR LOSS ANY EXCHANGE OF PROPERTY FOR STOCKS IN CORPORATIONS UNDER CERTAIN CONDITIONS, AMENDING FOR THE PURPOSE PARAGRAPHS TWO, THREE AND FIVE, SUBSECTION (c), SECTION THIRTY-FIVE OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED

SECTION 1. Paragraphs two, three and five, subsection (c), Section thirty-five of Commonwealth Act Numbered Four hundred and sixty-six, as amended, otherwise known as the National Internal Revenue Code, are further amended to read as follows:

"(2) Exceptions. — No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation, (b) a shareholder exchanges stocks in a corporation which is a party to the merger or consolidation solely for the stock of another corporation, also a party to the merger or consolidation, or (c) a security holder of a corporation which is a party to the merger or consolidation exchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation. No gain or loss shall also be recognized if a person exchanges his property for stock in 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: Provided, That stocks issued for services shall not be considered as issued in return for property. aisa dc

"(3) Exchange not solely in kind. — (a) If, in connection with an exchange described in the above exceptions, a shareholder, security holder or corporation receives not only stock or securities permitted to be received without recognition of gain or loss, but also money and/or other property, the gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and the fair market value of such other property received: Provided, That as to the shareholder, if the money and/or other property received has the effect of a distribution of a taxable dividend, there shall be taxed as a dividend to the shareholder an amount of the gain recognized not in excess of his ratable share of the undistributed earnings and profits of the corporation; the remainder, if any, of the gain recognized shall be treated as a capital gain.

"(b) If, in connection with the exchange described in the above exceptions, the transferor corporation receives not only stock permitted to be received without the recognition of gain or loss, but also money and/or other property, then (1) if the corporation receiving such money and/or other property distributed it in pursuance to the plan of merger or consolidation, no gain to the corporation shall be recognized from the exchange, but (2) if the corporation receiving such other property and/or money does not distribute it in pursuance of the plan of merger or consolidation, the gain, if any, but not the loss, to the corporation shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not distributed.

"(c) If the taxpayer, in connection with the exchanges described in the foregoing exception, receives stock or securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as a part of the consideration, another party to the exchange assumes a liability of the taxpayer, or acquires from the property subject to a liability, than such assumption or acquisition shall not be treated as money and/or other property, and shall not prevent the exchange from being within the exceptions.

"(5) Definitions. — (a) The term 'securities' means bonds and debentures but not 'notes' of whatever class or duration.

"(b) The term 'merger' or 'consolidation', when used in this section, shall be understood to mean; (1) the ordinary merger or consolidation, or (2) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: Provided, finally, That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term, 'property' shall be taken to include the cash assets of the transferor.

"(c) The term 'control' when used in this section shall mean ownership of stocks in a corporation possessing at least fifty-one per cent of the total voting power of all classes of stocks entitled to vote. casia

"(d) The Commissioner of Internal Revenue is hereby authorized to issue rules and regulations for the purpose of determining the proper amount of transferred assets which meet the standard of the phrase 'substantially all' and for the proper implementation of this section."

SECTION 2. This Act shall take effect upon its approval.

Approved: June 19, 1965

Published in the Official Gazette, Vol. 62, No. 49, p. 9225 on December 5, 1966