CAPITAL GAINS AND LOSSES

SEC. 39. Capital Gains and Losses. -

(A) Definitions. - As used in this Title -
(1) Capital Assets. - The term 'capital assets' means property held by the taxpayer (whether or
not connected with his trade or business), but does not include stock in trade of the taxpayer or
other property of a kind which would properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or property used in the trade or
business, of a character which is subject to the allowance for depreciation provided in
Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.
(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from sales or
exchanges of capital assets over the losses from such sales or exchanges.
(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from sales or
exchanges of capital assets over the gains from such sales or exchanges.
(B) Percentage Taken into Account - In the case of a taxpayer, other than a corporation, only
the following percentages of the gain or loss recognized upon the sale or exchange of a capital
asset shall be taken into account in computing net capital gain, net capital loss, and net income.
(1) One hundred percent (100%) if the capital asset has been held for not more than twelve
(12) months; and
(2) Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;
(C) Limitation on Capital losses. - Losses from sales or exchange capital assets shall be
allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company
incorporated under the laws of the Philippines, a substantial part of whose business is the
receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of
indebtedness issued by any corporation (including one issued by a government or political
subdivision thereof), with interest coupons or in registered form, any loss resulting from such
sale shall not be subject to the foregoing limitation and shall not be included in determining the
applicability of such limitation to other losses.
(D) Net Capital Loss Carry-Over. - If any taxpayer, other than a corporation, sustains in any
taxable year a net capital loss, such loss (in an amount not in excess of the net income for such
year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a
capital asset held for not more than twelve (12) months.
(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received by the holder
upon the retirement of bonds, debentures, notes or certificates or other evidences of
indebtedness issued by any corporation (including those issued by a government or political
subdivision thereof) with interest coupons or in registered form, shall be considered as amounts
received in exchange therefor.
(F) Gains or losses from Short Sales, Etc. - For purposes of this Title -
(1) Gains or losses from short sales of property shall be considered as gains or losses from
sales or exchanges of capital assets; and
(2) Gains or losses attributable to the failure to exercise privileges or options to buy or sell
property shall be considered as capital gains or losses.

Capital Assests/income
RR 2-40
SECTION 132.Definition of "capital assets." The law provides that the term "capital
assets" shall be held to mean property held by the taxpayer (whether or not connected with his
trade or business), but does not include stock in trade of the taxpayer or other property of a kind
which would properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, or property, used in the trade or business, of a character which is
subject to the allowance for depreciation provided in subsection (f) of Section 30 of the Code.
The term "capital asset" includes all classes of property not specifically excluded by Section
30(a).

The exclusion from the term "capital assets" of property used in the trade or business of a
taxpayer of a character which is subject to the allowance for depreciation provided in Section
30(f) of the Code is limited to property used by the taxpayer in the trade or business at the time
of the sale or exchange. It has no application to gains or losses arising from the sale of real
property used in the trade or business to the extent that such gain or loss is allocable to the land,
as distinguished from depreciable improvements upon the land. To such gain or loss allocable to
the land, the limitations of Section 34(b) and (c) apply (such limitation may be inapplicable to a
dealer in real estate, but, if so, it is because he holds the land primarily for sale to customers in
the ordinary course of his trade or business, not because land is subject to a depreciation
allowance). Gains or losses from the sale or exchange of property used in the trade or business
of the taxpayer of a character which is subject to the allowance for depreciation provided in
Section 30(f) of the Code, will not be subject to the percentage provisions of Section 34(b) and
losses from such transactions will not be subject to the limitation of losses provided in Section
30(c). (Real property used in taxpayer's trade or business is no longer capital asset per Am. R.A.
82.)
Ordinary assets/income

SEC. 22. Definitions. - When used in this Title:

(Z) The term 'ordinary income' includes any gain from the sale or exchange of property which
is not a capital asset or property described in Section 39(A)(1). Any gain from the sale or
exchange of property which is treated or considered, under other provisions of this Title, as
'ordinary income' shall be treated as gain from the sale or exchange of property which is not a
capital asset as defined in Section 39(A)(1). The term 'ordinary loss' includes any loss from the
sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of
property which is treated or considered, under other provisions of this Title, as 'ordinary loss'
shall be treated as loss from the sale or exchange of property which is not a capital asset.
DETERMINATION OF GAIN AND LOSS FROM SALE OR TRANSFER OF PROPERTY

SEC. 40. Determination of Amount and Recognition of Gain or Loss. -

(A) Computation of Gain or Loss. - The gain from the sale or other disposition of property
shall be the excess of the amount realized therefrom over the basis or adjusted basis for
determining gain, and the loss shall be the excess of the basis or adjusted basis for determining
loss over the amount realized. The amount realized from the sale or other disposition of
property shall be the sum of money received plus the fair market value of the property (other
than money) received;
(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - The basis of
property shall be -
(1) The cost thereof in the case of property acquired on or after March 1, 1913, if such property
was acquired by purchase; or
(2) The fair market price or value as of the date of acquisition, if the same was acquired by
inheritance; or
(3) If the property was acquired by gift, the basis shall be the same as if it would be in the hands
of the donor or the last preceding owner by whom it was not acquired by gift, except that if such
basis is greater than the fair market value of the property at the time of the gift then, for the
purpose of determining loss, the basis shall be such fair market value; or
(4) If the property was acquired for less than an adequate consideration in money or money's
worth, the basis of such property is the amount paid by the transferee for the property; or
(5) The basis as defined in paragraph (C)(5) of this Section, if the property was acquired in a
transaction where gain or loss is not recognized under paragraph (C)(2) of this Section.
(C) Exchange of Property. -
(1) General Rule. - Except as herein provided, upon the sale or exchange or property, the entire
amount of the gain or loss, as the case may be, shall be recognized.
(2) Exception. - 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; or
(b) A shareholder exchanges stock 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 such corporation, a
party to the merger or consolidation.
No gain or loss shall also be recognized if property is transferred to a corporation by a person in
exchange for stock or unit of participation in such a corporation of which as a result of such
exchange said person, alone or together with others, not exceeding four (4) persons, gains
control of said corporation: Provided, That stocks issued for services shall not be considered as
issued in return for property.
(3) Exchange Not Solely in Kind. -
(a) If, in connection with an exchange described in the above exceptions, an individual, a
shareholder, a security holder or a corporation receives not only stock or securities permitted to
be received without the recognition of gain or loss, but also money and/or 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 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 dividend to the shareholder an amount of the gain
recognized not in excess of his proportionate 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 (i) if the corporation receiving such money
and/or other property distributes it in pursuance of the plan of merger or consolidation, no gain
to the corporation shall be recognized from the exchange, but (ii) 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.
(4) Assumption of Liability. -
(a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions,
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 part of the consideration, another party to the
exchange assumes a liability of the taxpayer, or acquires from the taxpayer property, subject to a
liability, then 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.
(b) If the amount of the liabilities assumed plus the amount of the liabilities to which the
property is subject exceed the total of the adjusted basis of the property transferred pursuant to
such exchange, then such excess shall be considered as a gain from the sale or exchange of a
capital asset or of property which is not a capital asset, as the case may be.
(5) Basis -
(a) The basis of the stock or securities received by the transferor upon the exchange specified in
the above exception shall be the same as the basis of the property, stock or securities exchanged,
decreased by (1) the money received, and (2) the fair market value of the other property
received, and increased by (a) the amount treated as dividend of the shareholder and (b) the
amount of any gain that was recognized on the exchange: Provided, That the property received
as 'boot' shall have as basis its fair market value: Provided, further, That if as part of the
consideration to the transferor, the transferee of property assumes a liability of the transferor or
acquires form the latter property subject to a liability, such assumption or acquisition (in the
amount of the liability) shall, for purposes of this paragraph, be treated as money received by
the transferor on the exchange: Provided, finally, That if the transferor receives several kinds of
stock or securities, the Commissioner is hereby authorized to allocate the basis among the
several classes of stocks or securities.
(b) The basis of the property transferred in the hands of the transferee shall be the same as it
would be in the hands of the transferor increased by the amount of the gain recognized to the
transferor on the transfer.
(6) 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: (i) the ordinary merger or consolidation, or (ii) 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 transaction 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 percent (51%) of the total voting power of all classes of
stocks entitled to vote.
(d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized
to issue rules and regulations for the purpose "substantially all" and for the proper
implementation of this Section.
RR 2-40
SECTION 136.Basis for determining gain or loss from sale of property. For the purpose
of ascertaining the gain or loss from the sale or exchange of property, the basis is the cost of
such property, or in the case of property which should be included in the inventory, its latest
inventory value. But in the case of property acquired before March 1, 1913, when its fair market
value as of that date is in excess of its cost, the gain to be included in gross income is the excess
of the amount realized therefor over such fair market value. (See illustration I, Section 137 of
these regulations).
Also in the case of property acquired before March 1, 1913, when its fair market value as of that
date is lower than its cost the deductible loss is the excess of such fair market value over the
amount realized therefor. (See Illustration II, Id.). No gain or loss is recognized in the case of
property sold or exchanged (a) at more than cost but less than its fair market value as of March
1, 1913 (See Illustration III, Id.), or (b) at less than cost but at more than its fair market value as
of March 1, 1913. (See Illustration IV, Id., Id., Id.) In any case proper adjustment must be made
in computing gain or loss from the exchange or sale of property for any depreciation or
depletion sustained and allowable as deduction in computing net income; the amount of
depreciation previously charged off by the taxpayer shall be deemed to be true depreciation
sustained unless shown by clear and convincing evidence to be incorrect. What the fair market
value of property was as of March 1, 1913, is a question of fact to be established by evidence
which will reasonably and adequately make it appear.
The nature and extent of the sales and the circumstances under which they were made should be
considered. Prices received at forced sales or for small lots of property may be and often are no
real indication of the value of the amount of property in question. For instance, sales from time
to time of a small number of shares of stock is little indication of the value of a large or
controlling interest in the corporation. If the taxpayer can not determine the cost of securities
purchased prior to March 1, 1913, because of the loss, destruction, or failure to keep records,
the value of the securities at the date of approximate date of acquisition may be used in
determining the cost basis for purposes of computing the gain or loss from the sale of the
securities. When the date or approximate date of acquisition is unknown, no general rule can be
stated for determining the cost value of such securities. Each case must be considered separately
upon its own facts.

SECTION 137.Illustrations of the computation of gain or loss from the sale or exchange of
property acquired prior to March 1, 1913. To avoid complexity no adjustment has been
made in these examples for depreciation or depletion. In the case of property acquired before
March 1, 1913, when its fair market value as of that date is in excess of its cost, the taxable gain
is the excess of the amount realized therefor over such fair market value.
SECTION 138.Sale of property acquired by gift. In computing the gain or loss from the
sale or other disposition of property acquired by gift, the basis shall be the selling price and the
fair market value of the property at the time the gift was made, or its fair market value as of
March 1, 1913, if acquired prior thereto, determined in accordance with the next two preceding
sections. In the case of gifts made on or after July 1, 1939, the value taken as a basis for gift tax
purposes shall be considered as the fair market value in computing gain or loss from the sale or
other disposition of the property.

SECTION 139.Sale of property acquired by devise, bequests, or inheritance. In

computing the gain or loss from the sale or other disposition of property acquired by devise,
bequest, or inheritance, the basis shall be the fair market price or value of such property at the
time of the death of the decedent. The term "property acquired by bequest, devise, or
inheritance" as used herein includes (a) such property interests as the taxpayer has received as
the result of a transfer, or creation of a trust, in contemplation of or intended to take effect in
possession or enjoyment at or after death, and (b) such property interest as the taxpayer has
received as the result of the exercise by a person of a general power of appointment (1) by will,
or (2) by deed executed in contemplation of or intended to take effect in possession or
enjoyment at or after death. In the case of property acquired by gift, bequest, devise, or
inheritance, prior to March 1, 1913, the taxable gain or deductible loss from the sale or other
disposition thereof shall be computed in accordance with sections 136 and 137 of these
regulations. In the case of property acquired by bequest, devise or inheritance, its value as
appraised for the purpose of the inheritance tax shall be deemed to be its fair market value when
acquired.

SECTION 140.Exchange of property. Gain or loss arising from the acquisition and
subsequent disposition of property is realized only when as the result of a transaction between
the owner and another person the property is converted into other property (a) that is essentially
different from the property disposed of, and (b) that has a market value. The requirement that
the property received in exchange must be "essentially different from the property disposed of"
implies that there must be a change in substance and not merely a change in form. By way of
illustration, if a taxpayer owning ten shares of stock exchanges his stock certificate for a voting
trust certificate, no income is realized. The term "market value" means the fair value of the
property in money as between one who wishes to purchase and one who wishes to sell. It is not,
however, what can be obtained for the property when the owner is under peculiar compulsion to
sell or the purchaser to buy; nor is it a purely speculative value which an owner could not
reasonably expect to obtain for the property although he might possibly be fortunate enough to
do so. "Market value" is the price at which a seller willing to sell at a fair price and a buyer
willing to buy at a fair price, both having reasonable knowledge of the facts, will trade.
Evidence as to the assets and liabilities of a corporation and as to its earnings may furnish
definite indications of the market value of its stock.

SECTION 141.Determination of gain or loss from the exchange of property. The

amount of income derived or loss sustained from an exchange of property is the difference
between the market value at the time of the exchange of the property received in exchange and
the original cost, or other basis, of the property exchange. If the property exchanged was
acquired prior to March 1, 1913, see Sections 136 and 137 of these regulations.

SECTION 142.Readjustment of interest in a registered copartnership. When a partner

retires from a duly registered copartnership, or the partnership is dissolved, he realizes a gain or
loss measured by the difference between the price received for his interest and the cost to him of
his interest in the partnership including in such cost the amount of his share in any undistributed
partnership net income earned since he became a partner on which the income tax has been
paid. However, if such interest in the partnership was acquired prior to March 1, 1913, both the
cost as hereinbefore provided and the amount of such interest as of date, plus the amount of the
shares in any undistributed partnership net income earned since March 1, 1913, on which the
income tax has been paid, shall be ascertained and the taxable gain derived or the deductible
loss sustained shall be computed as provided in
Sections 136 and 137 of these regulations. If the partnership distributes its assets in kind and not
in cash, the partner realizes gain or suffers loss according to the market value of the property
received in liquidation. Whenever a new partner is admitted, to a partnership, or any existing
partnership is reorganized, the facts as to such change or reorganization should be fully set forth
in the next return of income, in order that the Commissioner of Internal Revenue may determine
whether any gain or loss has been realized by any partner.

SECTION 143.Basis of stock or securities acquired in "wash sales". In the sale or other
disposition of stocks or securities the acquisition of which (or the contract or option to acquire
which) resulted in the non-deductibility of the loss from the sale or other disposition of
substantially identical stock or securities the basis shall be the basis of the substantially identical
stock so sold or disposed of, increased or decreased, as the case may be, by the difference, if
any, between the price at which the stock or securities was acquired and the price at which such
substantially identical stock or securities were sold or otherwise disposed of. The application of
this rule may be illustrated by the following examples:

EXAMPLE (1): A purchased a share of common stock of the X Corporation for P100 in 1936,
which he sold January 15, 1940, for P80.00. On February 1, 1940, he purchased a share of
common stock of the same corporation for P90.00. No loss from the sale is recognized under
Section 33 of the Code. The basis of the new share is P110; that is, the basis of the old share
(P100) increased by P10, excess of the price at which the new share was acquired (P90) over
the price at which the old share was sold (P80).

EXAMPLE (2): A purchased a share of common stock of the X corporation for P100 in 1936,
which he sold January 15, 1940, for P80. On January 1, 1940, he purchased a share of common
stock of the same corporation for P70. No loss from the sale is recognized under Section 33 of
the Code. The basis of the new share is P90; that is, the basis of the old share (P100) decreased
by P10, the excess of the price at which the old share was sold (P80) over the price at which the
new share was acquired (P70). (See Section 131 of these regulations).

SECTION 143-A. Excerpts from B.I.R. General Circular No. V-253 publishing Republic
Act No. 1921 amending Section 35 of the Code, particularly subsection (c) thereof:
Features of the Amendment
1. Before and after the amendment. Under the provisions of subsection (c) of Section 35 of
the
National Internal Revenue Code, before its amendment by Republic Act No. 1921, when
property is exchanged for another property, the property received in exchange shall, for the
purpose of determining gain or loss, be treated as the equivalent of cash to the amount of its fair
market value. Paragraph 1 of subsection (c) of section 35 of the Tax Code after the amendment
states the general rule that upon the sale or exchange of property, the entire amount of gain or
loss as the case may be, is recognized, while paragraphs 2 and 3 give the exceptions where gain
or loss is not recognized, or gain is recognized only in part.

2. Exceptions to the rule recognizing gain or loss in exchanges of property solely in kind.
Under paragraph 2 of subsection (c) of Section 35 of the Tax Code after its amendment by
Republic Act No. 1921, no gain or loss shall be recognized in the following cases of exchanges
made in pursuance of a plan of merger or consolidation:
(a) By a corporation: If a corporation, a party to a merger or consolidation, in pursuance of such
plan of merger or consolidation, exchanges property solely for stock in another corporation, a
party to the merger or consolidation.
(b) By a shareholder: A shareholder who exchanges his stock in a corporation which is a party
to the merger or consolidation solely for stock of another corporation, also a party to the merger
or consolidation.
(c) By a security holder: A security holder of a corporation which is a party to the merger or
consolidation, who exchanges his securities in such corporation solely for stock or securities in
another corporation, a party to the merger or consolidation.

3. Recognition of gain in part but not loss, where exchanges are not solely in kind.
(a) By a shareholder or security holder. If in connection with an exchange made by a
shareholder or security holder described in the above exceptions, he receives not only stock or
securities, permitted to be received without recognition of loss or gain, but also money and/or
other property, then the gain, if any, to the recipient shall be recognized, but in an amount not in
excess of the sum of money and the fair market value of such other property. The loss, if any, to
the shareholder or security holder from such an exchange is not to be recognized to any extent.
However, if the distribution of such other property and/or money to a shareholder in the course
of a merger or consolidation has the effect of the distribution of a taxable dividend, there shall
be taxed to the distributee as a taxable dividend such an amount of the gain recognized on the
exchange as is not in excess of the distributee's ratable share of the undistributed earnings and
profits of the corporation, and as a capital gain, the remainder, if any, of the gain so recognized.

Example: A, in connection with a merger or consolidation in 1957 exchanges a share of stock in

the X Corporation (a party to the merger or consolidation) purchased in 1939 at a cost of P100
for a share of stock of the Y Corporation (also a party to the merger or consolidation), which has
a fair market value of P90, plus P20 in cash. The gain from the transaction is P10 and is
recognized and taxed as a gain from the exchange of property. However, if the share of stock
received had a fair market value of P70, the loss from the transaction of P10 would not be
recognized.
(b) By a corporation. If, in pursuance of a plan of merger or consolidation above described,
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, if such money and/or
other property received by the corporation is distributed by it pursuant to the plan of merger or
consolidation, no gain to the said corporation will be recognized. If the other property and/or
money received by the corporation is not distributed by it pursuant to the plan of merger and
consolidation, the gain, if any, to the corporation from the exchange will be recognized in an
amount not in excess of the sum of money and the fair market value of the other property so
received which is not distributed. In either case no loss from the exchange will be recognized.

4. Assumption of liability. Where upon an exchange described in the foregoing exceptions, a

taxpayer receives stock or securities which would be permitted to be received without the
recognition of gain if it were the sole consideration, and as part of the consideration, another
party to the exchange assumes a liability of the taxpayer, or acquires from the taxpayer property
subject to a liability, such assumption or acquisition shall not be considered as money and/or
other property, and shall not prevent the exchange from being within the exceptions.
Accordingly, the assumption of the aforesaid liabilities is not to be treated as other property or
money for the purpose of determining the amount of realized gain.

5. Basis of stock or securities for the purpose of determining gain or loss upon subsequent sale.
(a) By the transferor corporation, or its shareholder or security holder. The basis of the stock
or securities received by the transferor corporation or its shareholder or security holder upon the
exchange specified in the above exceptions shall be the same as the basis of the property, stock
or securities exchanged decreased by the money received and the fair market value of the other
property received, and increased by the amount treated as dividend of the shareholder and the
amount of any gain that was recognized on the exchange. The other property or "boot" received
in exchange shall have as basis its fair market value.

Examples:
1. A purchased a share of stock in the X Corporation in 1939 for P100. Pursuant to a plan of
merger or consolidation, A in 1957 exchanged his share for one share in the Y Corporation,
worth P90 and
P30 in cash. A realized a gain of P20 upon the exchange. The basis of the share of stock in the Y
Corporation is P90, that is, the basis of the share in the X Corporation (P100) less the amount of
money received by A (P30) plus the amount of the gain recognized on the exchange (P20).

2. A purchased a share of stock in the X Corporation in 1939 for P100. Upon a merger or
consolidation of the X Corporation in 1957, A received in place of his stock in the X
Corporation a share of stock in the Y Corporation worth P60, a Treasury Bond worth P50, and
in addition P20 in cash. A realized a gain of P30 upon the exchange. The basis of the property
received in exchange is the basis of the old stock decreased in the amount of money received
(P20) and increased in the amount of gain that was recognized (P30), which results in a basis
for the property received of P110. This basis of P110 is apportioned between the Treasury Bond
and the share of stock, the basis of the Treasury Bond being its fair market value at the date of
the exchange, P50, and of the share of stock, the remainder, P60.
(b) By the transferee. The basis of the property transferred in the hands of the transferee shall
be the same as it would be in the hands of the transferor, increased by the amount of the gain
recognized to the transferor on the transfer.
(c) If corporation shareholder or security holder received several kinds of stock or securities.
When securities of a single class were exchanged for new securities of different classes where
no gain or loss was recognized, the proper method of apportionment is to allocate to each class
of new securities that proportion of the original basis which the market value of the particular
class bears to the market value of all securities received on the date of the exchange, for
purposes of determining the gain or loss on the subsequent sale of any of the new securities. For
example, if 100 shares of common stock par value P100, are exchanged for 50 shares of
preferred and 50 shares of common each of P100 par value, and the cost of the old stock was
P250 per share, or P25,000, but the market value of the preferred stock on the date of the
exchange was P110 per share, or P5,500 for the 50 shares, and the market value of the common
was P440 per share or P22,000 for the 50 shares of common, one-fifth of the original cost, or
P5,000, would be regarded as the cost of the preferred and four-fifths, or P20,000 as the cost of
the common.

As previously shown cash "boot" operates in the first instance to reduce basis. Then to this
result must be added the gain recognized. The remainder is to be allocated between the several
types of stock and securities permitted to be received without the recognition of gain or loss. To
illustrate: The taxpayer in a nontaxable exchange trades A stock which cost P100 for one share
of common stock and one share of preferred stock of B corporation, together worth P100 (P100
each), and P50 cash.
The basis for the share of B common stock will therefore be P50 (1/2 of P100) and the B
preferred stock will likewise take a P50 basis.

6. Definitions:
(a) The term "securities" means bonds and debentures but not "notes" of whatever class or
duration.
(b) The term "merger" or "consolidation" shall be understood to mean the ordinary merger or
consolidation, or the acquisition by one corporation of all or substantially all the properties of
another corporation solely for stock. In order that a transaction may be regarded as a merger or
consolidation within the purview of the amendment, it must be undertaken for a bona fide
business purpose and not solely for the purpose of escaping the burden on taxation. 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. The term "property" shall be taken to include the cash assets of the transferor for
purpose of determining whether the property transferred constitutes a substantial portion of the
property of the transferor. "Substantially all" as used under this amendment means the
acquisition by one corporation of at least 80% of the assets, including cash, of another
corporation, which has the element of permanence and not merely momentary holding.
(Section 36 of the Code)
Exchange of Property
DEFINITION
SEC. 40. Determination of Amount and Recognition of Gain or Loss. -
(C) Exchange of Property. -
(6) 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: (i) the ordinary merger or consolidation, or (ii) 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 transaction 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 percent (51%) of the total voting power of all classes of
stocks entitled to vote.
(d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized
to issue rules and regulations for the purpose "substantially all" and for the proper
implementation of this Section.

ADMINISTRATIVE REQUIREMENTS IN CASE OF TAX-FREE EXCHANGE

(digest) RR 18-01
REVENUE REGULATIONS NO. 18-2001 issued November 14, 2001 prescribes the guidelines
on the monitoring of the basis of property transferred and shares received, pursuant to a tax-free
exchange under Section 40(C)(2) of the Tax Code, as well as the penalties for failure to comply
with the said guidelines and the policies governing the imposition of fees for the monitoring
thereof. The substituted basis of the stock or securities received by the transferor on a taxfree
exchange shall be as follows: 1) the original basis of the property, stock or securities to be
transferred; 2) less: a) money received, if any, and b) the fair market value of the property
received, if any; 3) plus: a) the amount treated as dividend of the shareholder, if any, and b) the
amount of any gain that was recognized on the exchange, if any. However, the property received
as 'boot' shall have as basis its fair market value. The term "boot" refers to the money received
and other property received in excess of the stock or securities received by the transferor on a
tax-free exchange. If the transferee of property assumes a liability of the transferor or acquires
from the latter property subject to a liability, such assumption or acquisition (in the amount of
the liability) shall, for purposes of computing the substituted basis, be treated as money received
by the transferor on the exchange. If the transferor receives several kinds of stock or securities,
the Commissioner is authorized to allocate the basis among the several classes of stocks or
securities. The substituted basis of the property transferred in the hands of the transferee, on the
other hand, shall be as follows: 1) the original basis in the hands of the transferor; 2) plus: the
amount of the gain recognized to the transferor on the transfer. The original basis of the
property to be transferred are specified in the Regulations. The substituted basis shall be the
basis for determining the gain or loss on a subsequent sale or disposition of property subject of
the tax-free exchange. The Certificate Authorizing Registration/Tax Clearance for the real
property or share of stock/unit of participation/interest involved in the exchange shall be issued
by the Revenue District Officer/authorized Internal Revenue Officer on the basis of the
certification or ruling to be issued by the Commissioner or his duly authorized representative to
the effect that the transaction qualifies as a tax-free exchange. No certification/ruling issued by
the Bureau of Internal Revenue (BIR) shall be valid unless the parties to the exchange submit to
the BIR copies of the new Transfer Certificates of the Title, Condominium Certificates of Title,
or certificates of stock/units of participation, duly certified by the Register of Deeds or the
Corporate Secretary, as the case may be, within ninety (90) days from receipt by any of the
parties to the exchange transaction of the certification-ruling by the Bureau. Every
applicant/taxpayer who wants to avail of the tax-free exchange shall secure a form that the BIR
shall provide for such purpose, and shall pay in advance a processing and certification fee of
Five Thousand Pesos (P 5,000.00) for each application not involving more than ten (10) real
properties and/or Certificates of Stock. An additional fee of One Hundred Pesos (P 100.00) shall
be paid for every Transfer Certificate of Title/Condominium Certificate of Title/Certificate of
Stock in excess of ten (10).

(full text) SUBJECT: Guidelines on the Monitoring of the Basis of Property Transferred
and Shares Received, Pursuant to a Tax-Free Exchange of Property for Shares under
Section 40(C)(2) of the National Internal Revenue Code of 1997, Prescribing the Penalties
for Failure to Comply with such Guidelines, and Authorizing the Imposition of Fees for
the Monitoring Thereof.

SECTION 3. Submission of Information on the Basis of Properties. - The parties to a tax-free

exchange of property for shares under Section 40(C)(2) of the Tax Code of 1997 who are
applying for confirmation that the transaction is indeed a tax-free exchange shall, together with
such information as the Commissioner of Internal Revenue may require, submit the following:

(a) A sworn certification on the basis of the property to be transferred pursuant to such
exchange. The basis of each real property/share of stock or other property transferred must be
itemized in the certification in order to enable the BIR to determine the basis for subsequent
disposition and to make it possible for the Register of Deeds or the corporate secretary, as the
case may be, to annotate the information on such basis for each property/share of stock on the
reverse side of the Transfer Certificate of Title/Condominium Certificate of Title of the real
property involved, or of
Certificate of Stock. The sworn declaration must be executed by the transferor himself, or in
case the transferor is a juridical entity, by an official with rank of no less than the Chief
Financial Officer or his equivalent. The Commissioner of Internal Revenue is authorized to
prescribe the form in which such sworn declaration shall appear.

(b) Certified true copies of the Transfer Certificates of Title and/or Condominium Certificates of
Title of the real properties to be transferred;

(c) Certified true copies of the corresponding latest Tax Declaration of the real properties to be
transferred. It is understood that any improvement is separately declared and therefore, covered
by a Tax Declaration distinct from the Tax Declaration on the land. Further, if the tax
declaration was issued three (3) or more years prior to the exchange transaction, the Transferor
shall include in the certification by the local government unit's Assessor that such tax
declaration is the latest tax declaration covering the real property;

(d) Certified true copies of the certificates of stocks evidencing shares of stock to be transferred;
and

(e) Certified true copy of the inventory of other property/ies to be transferred.

No certification/ruling will be issued by the Bureau of Internal Revenue unless the foregoing
requirements, in addition to such other documents that the Commissioner of Internal Revenue
may require, are submitted.

SECTION 4. Information to be Contained in Certification/Ruling by the Bureau of

Internal Revenue. - All certifications or rulings issued by the Bureau of Internal Revenue
confirming that an exchange of property for shares complies with the provisions of Section
40(C)(2) of the Tax Code of 1997 shall include a statement on the substituted basis of the
property transferred.

SECTION 5. Conditions for the Issuance of Certificate Authorizing Registration (CAR) or

Tax Clearance (TCL). - The CAR/TCL for the real property or share of stock/unit of
participation/interest involved in the exchange shall be issued by the Revenue District
Officer/Authorized Internal Revenue Officer on the basis of the certification or ruling to be
issued in triplicate by the Commissioner or his duly authorized representative to the effect that
the transaction qualifies as a tax-free exchange under Section 40(C)(2) of the Tax Code of 1997.
The CAR/TCL to be issued shall specify, among others, that the transaction involved is a tax-
free exchange under Section 40(C)(2) of the Tax Code of 1997; the date of exchange; and the
substituted basis of the properties as stated in the certification or ruling issued by the Bureau of
Internal Revenue.

SECTION 6. Information to be annotated in the Transfer Certificate of Title or

Condominium Certificate of Title issued by the Register of Deeds, and on the Certificate
of Stock/Units of Participation issued by the Corporate Secretary. -- In cases of transfers or
exchanges falling under Section 40(C)(2) of the Tax Code of 1997, the following information
shall be annotated on the reverse side of the Transfer Certificate of Title or Condominium
Certificate of Title or certificate of stock that is transferred or issued pursuant to such transfer or
exchange:
"The acquisition of the property described in this title/certificate is by virtue of a tax-free
exchange pursuant to Section 40(C)(2) of the National Internal Revenue Code of 1997 per Deed
of Exchange/ Assignment dated _________________. The substituted basis pursuant to Section
40(C)(5) of the National Internal Revenue Code of 1997 is in the amount of
_________________________________."
The following persons shall be responsible for making the above annotation:
(a) The Registrar of Deeds, with respect to the Transfer Certificate of Title or Condominium
Certificate of Title of real property that is transferred;
(b) The Corporate Secretary or equivalent officer of the investee corporation/partnership whose
shares/units are transferred by the Transferor to the transferee/surviving/consolidated
corporation;
(c) The Corporate Secretary of transferee/surviving/consolidated corporation, upon the issuance
of the certificates of stock evidencing the original shares issued pursuant to the transfer or
exchange.
The annotation shall be made on the reverse side of the Transfer Certificate of Title or
Condominium Certificate of Title, or certificate of stock/unit of participation, as the case may
be. In addition to the foregoing, each Deed of Exchange/Assignment transferring such property
must state that the parties thereto shall undertake to comply with the provisions of these
Regulations.

SECTION 9. Fees to be Paid by the Applicant/Taxpayer. -- Every applicant/taxpayer who

wants to avail of the tax-free exchange in accordance with Section 40(C)(2) and 6(b) and (c) of
the Tax Code of 1997 shall secure a form that the Bureau shall provide for such purpose and
shall pay in advance a processing and certification fee of Five Thousand Pesos (P5,000.00) for
each application not involving more than ten (10) real properties and/or Certificates of Stock.
An additional fee of One Hundred Pesos (P100.00) shall be paid for every Transfer Certificate
of Title/Condominium Certificate of Title/ Certificate of Stock in excess of ten (10).

SECTION 10. Penalties. -- Every official, agent, or employee of the Registry of Deeds who is
guilty of failing to annotate the information stated in Section 5 hereof shall, upon conviction for
each omission, be punished by a fine of not less than Fifty Thousand Pesos (P50,000.00) but not
more than One Hundred Thousand Pesos (P100,000.00) and suffer imprisonment of not less
than ten (10) years but not more than fifteen (15) years and shall likewise suffer an additional
penalty of perpetual disqualification to hold public office, to vote, and to participate in any
public election pursuant to Section 58(E) in relation to Section 269 of the Tax Code of 1997.

Every Corporate Secretary or the duly authorized officer of the corporation who is guilty of
failing to annotate the information stated above shall, upon conviction for each omission, be
punished by a fine of not more than One Thousand Pesos (P1,000.00), or suffer imprisonment
of not more than six (6) months, or both pursuant to Section 275 of the Tax Code of 1997.

Any other violation of the provisions of these Regulations by any of the parties to the exchange
transaction or by any responsible public officer, shall be subject to the appropriate penalties
provided under the Tax Code of 1997, and/or the Revised Penal Code.

SECTION 11. REPEALING CLAUSE. - Any Revenue Regulations or Revenue Memorandum

Order, or provisions of any revenue issuance, inconsistent with these Regulations are hereby
repealed accordingly.
SECTION 12. EFFECTIVITY CLAUSE. - These Regulations shall take effect fifteen (15) days
after publication in any newspaper of general circulation.
(digest) RMR 1-02
REVENUE MEMORANDUM RULINGS NO. 1-2002 issued on May 9, 2002 consolidates,
provides, clarifies and harmonizes the existing guidelines on the tax consequences of a de facto
merger pursuant to Section 40(C)(2) and (6)(b) of the National Internal Revenue Code of 1997.
A de facto merger involves the acquisition by one corporation of all or substantially all the
properties of another corporation solely for stock. The phrase substantially all the properties of
another corporation mean the acquisition by one corporation of at least 80% of the assets,
including cash, of another corporation, which has the element of permanence and not merely
momentary holding.

To constitute a de facto merger, the following elements must occur:

1) there must be a transfer of all or substantially all of the properties of the transferor
corporation solely for stock; and
2) it must be undertaken for a bona fide business purpose and not solely for the purpose of
escaping the burden of taxation.

The provisions of the Ruling shall apply solely and exclusively to situations in which the facts
are substantially similar to the facts specified in the Ruling. The Transferor (a domestic
corporation) shall not recognize any gain or loss on the transfer of the property to the
Transferee. Consequently, the Transferor will not be subject to Capital Gains Tax, Income Tax,
nor to Creditable Withholding Tax on the transfer of such property to the Transferee. Neither
may the Transferor recognize a loss, if any, incurred on the transfer. In addition, the assumption
of liabilities or the transfer of property that is subject to a liability does not affect the non-
recognition of gain or loss under Section 40(C)(2) of the Tax Code of 1997, since in this case,
the total amount of such liabilities does not exceed the basis of the property transferred.

The Transferee is not subject to Income Tax on its receipt of the property as contribution to its
capital, even if the value of such property exceeds the par value or stated value of the shares
issued to the Transferor. The Transferor is not subject to Donors Tax, regardless of whether the
value of the property transferred exceeds the par/stated value of the Transferee shares issued to
the Transferor, there having no intent to donate on the part of the transferor. The Transferor is
not subject to Value-Added Tax (VAT) on the transfer of the property if it is not engaged in a
business that is subject to the VAT. Even if the Transferor is engaged in an activity that is
subject to VAT, it is nonetheless not subject to VAT on the transfer of the property to the
Transferee. The Documentary Stamp Tax consequences of the transfer, including the time of
payment of the tax are specified in the Ruling.
RULINGS

(digest) RMC 40-2012

REVENUE MEMORANDUM CIRCULAR NO. 40-2012 issued on August 6, 2012 prescribes
a period of prescription for rulings under Section 40(C)(2) of the National
Internal Revenue Code (NIRC), as amended.

Said rulings shall be valid only for 90 days counted from the date of receipt of the ruling by any
of the parties to the exchange transaction. The properties and shares of stocks involved in the
transfer should be conveyed to the transferee/s and transferor/s,respectively, within this period.
Pursuant to Revenue Regulations (RR) No. 18-2001 and Revenue Memorandum Order (RMO)
No. 32-01, a photocopy of the Transfer Certificate of Title (TCT)/Condominium Certificate of
Title (CCT)/Share of Stock that bears the annotation of substituted basis of the real
property/shares of stock transferred/received in connection with the transaction, as duly
certified by the Register of Deeds/Corporate Secretary, should be submitted to the Law
Division, Bureau of Internal Revenue, 7/F National Office Building, Diliman, Quezon City, also
within 90 days from the date of receipt of the ruling or certification, by any of the parties to the
exchange transaction.

Otherwise, the ruling shall be void and without effect, and the Chief, Law Division shall refer
the docket of the case to the Prosecution Division for appropriate action.
Any violation of this Circular by any of the parties to the exchange transaction or by any public
officer or employee shall be subject to the appropriate penalties provided under Sections 269
and 275 of the NIRC, as amended, as implemented by RR No. 18- 2001 and RMO No. 32-01.

Unless an extension of the period is granted by the Commissioner in meritorious cases,

Revenue District Offices are hereby directed not to honor such rulings beyond 90 days counted
from the date of receipt of the ruling by any of the parties to the exchange.
LOSSES FROM WASH SALES OF STOCKS OR SECURITIES
SEC. 38. Losses from Wash Sales of Stock or Securities. -
(A) In the case of any loss claimed to have been sustained from any sale or other disposition of
shares of stock or securities where it appears that within a period beginning thirty (30) days
before the date of such sale or disposition and ending thirty (30) days after such date, the
taxpayer has acquired (by purchase or by exchange upon which the entire amount of gain or
loss was recognized by law), or has entered into a contact or option so to acquire, substantially
identical stock or securities, then no deduction for the loss shall be allowed under Section 34
unless the claim is made by a dealer in stock or securities and with respect to a transaction made
in the ordinary course of the business of such dealer.
(B) If the amount of stock or securities acquired (or covered by the contract or option to
acquire) is less than the amount of stock or securities sold or otherwise disposed of, then the
particular shares of stock or securities, the loss from the sale or other disposition of which is not
deductible, shall be determined under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
(C) If the amount of stock or securities acquired (or covered by the contract or option to acquire
which) is not less than the amount of stock or securities sold or otherwise disposed of, then the
particular shares of stock or securities, the acquisition of which (or the contract or option to
acquire which) resulted in the non-deductibility of the loss shall be determined under rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

RR2 -40
SECTION 131.Losses from wash sales of stock or securities. (a) A taxpayer cannot deduct
any loss claimed to have been sustained from the sale or other disposition of stock or securities,
if, within a period beginning thirty days before the date of such sale or disposition and ending
thirty days after such date (referred to in this section as the sixty-one-day period), he has
acquired (by purchase or by an exchange upon which the entire amount of gain or loss was
recognized by law), or has entered into a contract or option so to acquire, substantially identical
stock or securities. However, this prohibition does not apply in the case of a dealer in stock or
securities if the sale or other disposition of stock or securities is made in the ordinary course of
its business as such dealer.
(b) Where more than one loss is claimed to have been sustained within the taxable year from the
sale or other disposition of stock or securities, the provisions of this section shall be applied to
the losses in the order in which the stock or securities the disposition of which resulted in the
respective losses were disposed of (beginning with the earliest disposition). If the order of
disposition of stock or securities disposed of at a loss on the same day cannot be determined, the
stock or securities will be considered to have been disposed of in the order in which they were
originally acquired (beginning with earliest acquisition).
(c) Where the amount of stock or securities acquired within the sixty-one day period is less than
the amount of stock or securities sold or otherwise disposed of, then the particular shares of
stock or securities the loss from the sale or other disposition of which is not deductible shall be
those with which the stock or securities acquired are matched in accordance with the following
rule:
The stock or securities acquired will be matched in accordance with the order of their
acquisition (beginning with the earliest acquisition) with an equal number of the shares of stock
or securities sold or otherwise disposed of.
(d) Where the amount of stock or securities acquired within the sixty- one-day period is not less
than the amount of stock or securities sold or otherwise disposed of, then the particular shares
of stock or securities the acquisition of which resulted in the non-deductibility of the loss shall
be those with which the stock or securities disposed of are matched in accordance with the
following rule:
The stock or securities sold or otherwise disposed of will be matched with an equal number of
the shares of stock or securities acquired in accordance with the order of acquisition (beginning
with the earliest acquisition) of the stock or securities acquired.
(e) The acquisition of any security which results in the non-deductibility of a loss under the
provisions of this section shall be disregarded in determining the deductibility of any other loss.
(f) The word "acquired" as used in this section means acquired by purchase or by an exchange
upon which the entire amount of gain or loss was recognized by law, and comprehends cases
where the taxpayer has entered into a contract or option within the sixty-one-day period to
acquire by purchase or by such an exchange.

EXAMPLE (1): A, whose taxable year is the calendar year, on December 1, 1939, purchased
100 shares of common stock in the M Company for P10,000 and on December 15, 1939,
purchased 100 additional shares for P9,000. On January 2, 1940, he sold the 100 shares
purchased on December 1, 1939, for P9,000. Because of the provisions of Section 33 no loss
from the sale is allowable as a deduction.

EXAMPLE (2): A, whose taxable year is the calendar year, on September 21, 1939, purchased
100 shares of the common stock of the M Company for P5,000. On December 21, 1939, he
purchased 50 shares of substantially identical stock for P2,750, and on December 26, 1939, he
purchased 25 additional shares of such stock for P1,125. On January 2, 1940, he sold for P4,000
the 100 shares purchased on September 21, 1939. There is an indicated loss of P1,000 on the
sale of the 100 shares. Since within the sixty-one-day period A purchased 75 shares of
substantially identical stock, the loss on the sale of 75 of the shares (P3,750 less P3,000, or
P750) is not allowable as a deduction because of the provisions of Section 33. The loss on the
sale of the remaining 25 shares (P1,250 less P1,000, or P250) is deductible subject to the
limitations provided in Sections 31(b) and 34. The basis of the 50 shares purchased December
21, 1939, the acquisition of which resulted in the non-deductibility of the loss (P500) sustained
on 50 of the 100 shares sold on January 2, 1940, is P2,500 (the cost of 50 of the shares sold on
January 2, 1940), plus P750 [the difference between the purchase price of the 50 shares
acquired on December 21, 1939, (P2,750) and the selling price of 50 of the shares sold on
January 2, 1940 (P2,000)], or P3,250. Similarly the basis of the 25 shares purchased on
December 26, 1939, the acquisition of which resulted in the non-deductibility of the loss
(P250) sustained on 25 of the shares sold on January 2, 1940, is P1,250 plus P125, or P1,375.
(See
Section 143 of these regulations.)
EXAMPLE (3): A, whose taxable year is the calendar year, on September 15, 1938, purchased
100 shares of the stock of the M Company for P5,000. He sold these shares on February 1,
1940, for P4,000. On each of the four days from February 15, 1940, to February 18, 1940, he
purchased 50 shares of substantially identical stock for P2,000. There is an indicated loss of
P1,000 from the sale of the 100 shares on February 1, 1940, but since within the sixty-one-day
period A purchased not less than 100 shares of substantially identical stock, the loss is not
deductible. The particular shares of stock the purchase of which resulted in the nondeductibility
of the loss are the first 100 shares purchased within such period, that is, the 50 shares purchased
on February 15, 1940, and the 50 shares purchased on February 16, 1940. (Section 34 of the
Code)