In order to facilitate the determination of whether transfer of properties by individual or corporation in exchange for shares of stock of another corporation falls under Section 34(c) (2) of the National Internal Revenue Code, the following requirements must be met, and the conditions complied with by both transferor and transferee corporation.

The procedures outlined hereunder shall be observed in the monitoring and investigation of tax-free exchange to ascertain compliance with the conditions set forth in the adjudication letter/ruling issued by this Office, and in the consequent assessment of tax liabilities if any, due upon subsequent disposition of the properties involved in the exchange.

I
Documentation Requirements

A. BIR Adjudication letter/ruling

Any written request to be filed with the Legislative, Ruling and Research Division for a BIR Ruling on the tax consequence of the transfer/exchange of properties described hereunder must be accompanied by the following documents.

1) In the case of Merger or Consolidation -

(a)	Plan of Corporate Merger or Consolidation;
(b)	Statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject;
(c)	Articles of Incorporation duly registered with SEC of the merging or consolidating corporations; and
(d)	Other pertinent documents.

2) In the case of transfer of property to a controlled corporation.

(a)	Deed of Transfer/Assignment/Exchange;
(b)	Articles of Incorporation duly registered with SEC of a corporate transferor and transferee corporation;
(c)	Copy of the corresponding Transfer Certificate of Titles;
(d)	Copy of the corresponding Tax Declaration;
(e)	Certification as to the original or historical cost of acquisition/adjusted cost basis of the properties transferred;
(f)	Certification of the fair market value or zonal value of the property involved in the exchange;
(g)	Certification by the corporate secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stock;
(h)	Certification of percentage of ownership of the shares of stock by the transferor as a result of the transaction; and
(i)	Other pertinent documents.

B. Records to be kept and information to be filed

In order that the parties to the exchange can avail of the non-recognition of gains under Section 34(c) (2) of the Tax Code, the following requirements must be complied with:

1) In the case of Merger or Consolidation

(a) The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as part of its return for the taxable year within which the reorganization occurred a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including:

(1)	A copy of the plan of reorganization, together with a statement, executed under the penalties of perjury, showing in full the purposes thereof and in detail all transactions incident to, or pursuant to the plan.
(2)	A complete statement of the cost or other basis of all property, including all stocks or securities, transferred incident to the plan.
(3)	A statement of the amount of stock or securities and other property or money received from the exchange, including a statement of all distribution or other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value thereof at the date of the exchange.
(4)	A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject.

(b) Every taxpayer, other than a corporation, a party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such exchange including:

(1)	A statement of the cost or other basis of the stock or securities transferred in the exchange; and
(2)	A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of the exchange.

(c) Permanent records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject), in order to facilitate the determination of gain or loss from a subsequent disposition of such stock or securities and other property received from the exchange.

In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporation participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received as a consequence of the merger.

In a merger or consolidation, one (1) of the corporations would necessarily be dissolved so that, under Section 235 of the Tax Code, it should be subjected to an investigation for all tax purposes. Proof should be submitted by any of the two (2) entities to the Legislative, Ruling and Research Division that there was such an investigation conducted or is being conducted by the BIR.

2) In the case of transfer of property to a controlled corporation. -

(a) The transferor/s must file with his/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 Sworn Statement as to how the property was acquired;
(2)	A description of the properties transferred, or of their interest in such properties, with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfer;
(3)	The kind of stock received and preference, if any;
(4)	The numbers of shares of each class received, and
(5)	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 transferor/s;

(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:

(i)	The total issued and outstanding capital stock immediately prior to and immediately after the exchange with a complete description of each class of stock;
(ii)	The classes of stocks and number of shares issued to the transferors in the exchange; and
(iii)	The fair market value as of the date of the exchange of the capital stock issued to the transferors.

(c) 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.

(d) The parties shall cause to be annotated on the Transfer Certificates of Titles (in the case of real property) or at the back of the Certificate of Stocks (in the case of shares of stock), the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock involved, and the fact that no gain or loss was recognized as a result of the exchange.

II
Conditions for the Issuance of
Certificate Authorizing Registration (CAR)
No CAR for the real property involved in the exchange shall be issued by the Revenue District Officer/Authorized Internal Revenue Officer concerned unless a determination letter/ruling has been issued by the Commissioner to the effect that the transaction qualifies as a tax-free exchange or corporate reorganization under Section 34(c) (2) of the Tax Code.

The CAR to be issued shall specify among others that the transaction involved is a tax-free exchange under Section 34(c) (2) of the Tax Code; the date of exchange; and the original or historical cost of acquisition of the properties as verified.

Documentary stamp tax imposed under Section 196 of the Tax Code shall be determined and collected based on the consideration received or contracted for such realty exchanged, i.e. the corresponding value of the shares of stock; the original issues of Certificates of Stocks by the transferee corporation shall be subject to documentary stamp tax imposed by Section 175 of the same Code.

III
Requirements for the Registration or
Properties

A. The Register of Deeds having jurisdiction of the place where the property exchanged is located shall cause the registration/transfer of the Transfer Certificate of Title (TCT) in the name of the transferee corporation only upon presentation of the CAR duly issued by the Revenue District Officer/Authorized Internal Revenue Officer.

The Register of Deeds shall cause the annotation at the back of the TCT to be issued the statement that the transfer of properties is a Tax-Free Exchange under Section 34(c) (2) of the Tax Code or the fact that no gain or loss was recognized as a result of such exchange; the original or historical cost of acquisition thereof, and the date of execution of the Deed of Transfer/Exchange.

B. The Corporate Secretary of the Transferee Corporation shall cause the registration in its stock transfer book the name/names of the stockholders whose properties were exchanged for shares of stock;

 Documentary Stamp Tax imposed under Section 175 of the Tax Code shall be paid to and collected by the Revenue District Officer concerned on the Certificate of stocks which are original issues by the transferee corporation in exchange for the property of the transferor.

IV
Monitoring/Investigation of Tax-Free
Exchanges

A. The Legislative, Ruling and Research Division shall every now and then refer copy/copies of adjudication letters/rulings issued in connection with tax-free exchange of properties to the respective Revenue District Officers having jurisdiction of the place where the real property is located, for verification and monitoring if the conditions set forth therein have been complied with.

B. Since under Section 34(c) (2) of the Tax Code there is merely a deferment of recognition of gain or loss on the transfer/exchange of properties, any subsequent disposition of the properties involved in the exchange shall be subject to the corresponding income tax on the gain or income derived by the transferor or transferee corporation.

C. In determining the income and documentary stamp taxes due on subsequent disposition of the properties involved in the exchange, the basis of the computation shall be the difference between the original/historical or adjusted cost of acquisition of the property and the consideration of sale or the fair market value/zonal value of the property, whichever is higher. On the other hand, the cost basis of the shares of stock shall be the same as the original acquisition cost or adjusted cost basis to the transferor of the properties exchanged therefor.

V
Repealing Clause

All regulations, rules, orders or portions thereof contrary to or inconsistent with the provisions of this Order are hereby modified and/or repealed accordingly.

VI
Effectivity

This Order shall take effect immediately.

Adopted: 28 May 1992