Ruling on tax-free exchanges not mandatory
IN the recent case of Lucio L. Co, Susan P. Co, Ferdinand Vincent P. Co and Pamela Justine P. Co, vs. Commissioner of Internal Revenue, CTA Case No. 8831 decided on June 2, 2016, the Court of Tax Appeals confirmed that prior BIR ruling or certification on tax-free exchanges is not mandatory.
In this instance, four stockholders agreed to transfer their shareholdings (property) in one company in exchange for shares of another company thereby gaining control of the transferee. They paid capital gains tax (CGT) and documentary stamp tax (DST) on the transfer of shares. However, it was later found that the transfer of property for shares to gain additional control can qualify for exemption from CGT under Section 40 (C) (2) of the Tax Code. Hence, they filed a claim for refund of the CGT with BIR and, subsequently with the CTA.
The BIR denied the claim for failure to apply for a certification or ruling from the BIR to confirm the tax-exempt status of the exchange pursuant to Revenue Regulations (RR) No. 18-2001 and Revenue Memorandum Order (RMO) Nos. 32-2001 and 17-2002.
On appeal, the CTA en Banc upheld the decision of the CTA division that failure to secure prior certification or ruling from the BIR on the exempt status of the transaction should not deprive a taxpayer from claiming the exemption. To be entitled to the exemption, it is sufficient that the four requisites under Section 40 (C) (2) of the Tax Code are complied with, to wit: (1) the transferee is a corporation; (2) the transferee exchanges its shares of stock for property/ies of the transferor; (3) the transfer is made by person, acting alone or together with others, not exceeding four persons; and (4) as a result of the exchange, the transferor, alone or together with the others, not exceeding four, gains control of the transferee. The relative RR and RMOs are mere guidelines for the proper monitoring and investigation of the basis of the properties transferred pursuant to a tax-free exchange.