IT - Tax-Free Exchanges of Properties Pursuant To A Merger Or Consolidation

Question 1

What transactions are covered under Sec. 40 (C) (2), NIRC?

Answer 1

If, in pursuance of a plan of MERGER OR CONSOLIDATION:

A.) A transferor-corporation exchanges property solely for stock in a corporation (both being parties to M/C)

B.) A transferor-shareholder exchanges stock in a corporation solely for the stock of another corporation (both corporations being parties to M/C)

C.) A security holder of a corporation exchanges his securities in such corporation for securities in another corporation (both corporations being parties to M/C)

2. A person transfers his property to a corporation in exchange for stock, of which he gains control of said corporation (either alone or with a group not exceeding total of 4 persons)

Question 2

What are the tax consequences of tax-free exchanges?

Answer 2

1. The TRANSFEROR shall NOT recognize gain or loss (no CGT, no income tax, no CWT, no donor’s tax, no VAT)
2. The basis (cost) of the stock or securities received by the transferor shall be the same basis as the stock, property, or securities transferred (substituted basis).

Question 3

What if the transferor receives not only stocks, but also money or property?

Answer 3

GAIN but not LOSS shall be recognized

Question 4

The money and/or property received in a tax free exchange is called …

Answer 4

Boot

Question 5

What is the tax consequence if money and/or property is received in a tax free exchange?

Answer 5

Gain to be recognized shall not exceed the boot received.

Cost of stock transferred
Less: money received
Less: FMV property received
Balance

Add: gain recognized
Add: amt treated as dividend

= cost of stock received

Question 6

When is gain not recognized when there is boot?

Answer 6

If the transferor is a corporation and the boot is distributed in accordance with the plan of merger or consolidation