Distributions of Dividends or Assets by Corporations

Dividends means any distribution made by a corp. to its shareholders out of its
earnings or profits and payable to its shareholders, whether in money or in other
property.
Where a corp. distributes all of its assets in complete liquidation or dissolution, the
gain realize or loss sustained by the stockholder, whether individual or corporate is
a taxable income or a dedeuctible loss, as the case may be.
Stock Dividend
- A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.
However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner
as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to
the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock
shall be considered as taxable income to the extent that it represents a distribution of earnings or profits.
Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. - Any distribution
made to the shareholders or members of a corporation shall be deemed to have been made form the
most recently accumulated profits or surplus, and shall constitute a part of the annual income of the
distributee for the year in which received.

Capital Gains Tax

For DC and RC the sale of real property outside the Phils is subj to normal
corporate income tax. This is a NIT so it is based on gain. While, the sale of real
property by a NRC is subject to tax at a rate of 30% based on gross.
RA 9337 (b):
Tax on NRFC
Except as otherwise provided in this Code, a FCNETB in the Phils shall pay a tax
equal to 35% of the gross income received during each taxable year rom all sources
within the Philippines, such as interests, dividends, rents, royalties, premiuims
(except reinsurance premiuims) annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and income, and capital gains,
except capital gains subjj to tax under subpar 5. Provided, that eff Jan 1, 2009 the
rate of income tax shall be 30%
Minimum Corporate Income Tax
A corp has a min. income tax liability on its 4 th year immediately ff. the yr. when
such corp. commenced its business. While it is settled that taxes are based on ones
ability to pay, if a taxpayer engaged in trade or business incurs losses then, there
will be no taxes to speak of. With the advent of MCIT, taxes due in by way of expn. A
corp. may suffer losses, but stull may incur tax liability. There is no escape in MCIT.

The reason is basic. The imposable tax herein is based not with the net but on the
gross income. But one should not be confused with the gross income referred to in
sec. 31 for taxable ncome and sec. 32 (A) on the gen. def. of gross income.
A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable
year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the
fourth taxable year immediately following the year in which such corporation commenced its business
operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this
Section for the taxable year. (sec. 27(E))
RR no. 9-98 specifies the period when a corp becomes subj to MCIT
For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in
which the domestic corp. registered with the BIR.

Firms which were registered with the BIR in 1994 and earlier shall be covered by the
MCIT beginning Jan. 1, 1998.
Concept and Rationale of the MCIT
MCIT on DC is a new concept introduced by RA8424 to the Phil. Taxation system. It
came about as a result of the perceived inadequacy of the self-assessment system
in capturing the true income of corp. it was devised as a relatively simple and
effective revenue-raising instrument compared to the normal income tax which is
more difficult to control and enforce. It is a means to ensure that everyone will make
some minimum contributions to the support of the public sector.
Mr. Javier: This is what the finance dept. is trying to remedy, that is why they have
proposed the MCIT. Because from experience too, you have corp. which have been
losing year in and year out and paid no tax. So if the corp has been losing for the
past five years to ten years, then that corp. has no business to be in business. It is
dead. Why continue if you are losing year in and year out? So, we have this
provision to avoid this type of tax shelters.
To emphasize the corrective nature of the MCIT, the ff. safeguards were
incorporated into the law:
1. Recognizing the birth pangs of businesses and the reality of the need to
recoup initial major capital expenditures, the imposition of the MCIT
commences only on the 4th taxable year immediately ff. the year in which the
corp. commenced its operations. This grace period allows a new business to
stabilize first and make its ventures viable before it is subjected to MCIT.
2. The law allows the carrying forward of any excess of the MCIT paid over the
normal income tax which shall be credited against the normal income tax
which shall be credited against the normal income tax for the 3 immed.
Succeeding years.

3. Since certain businesses may be incurring genuine repeated losses, the law
authorizes Sec. of Finance to suspend the imposition of MCIT if a corp. suffers
losses due to prolonged labor dispute, force majeure and legitimate business
reverses.
Benefits-protection theory
DC owe their corporate existence and their privilege to do business to the govt.
they also benefit from the efforts of the government to improve the financial
market and to ensure a favourable business climate. It is therefore fair for the
govt to require them to make a reasonable contribution to the public expenses.
Requisites of MCIT:
1. At least 4 years of operation (taxable yr plus 4)
2. At a net loss or the normal corporate income tax is lesser than the MCIT
and
3. Credited over the 3 year reglementary period.

Corporations subject to MCIT

1. DC
2. RFC
A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section
27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation
taxable under paragraph (1) of this Subsection. {sec. 23(A)(2)}
Illustration:
A RFC engaged in business as international carrier is subj. to Gross Philippine Billings tax of 2.5%.
not being subjected to taxable income, it is not subject to MCIT. Same applies to OBU.

MCIT on Proprietary Educational Institution or Non-profit Hospitals

Proprietary educ. Insti. Or non-profit hospitals shall pay a preferential tax rate of 10% imposed on their
taxable income subject to the 50% rule. The related provision concerning MCIT is found under sec. 27E.
It provides that MCIT of 2% of the gross income as of the end of the table year is hereby imposed on a
corp. taxable beginning on the 4th taxable year immed. Following the year in which such corp.
commenced its business operations, when the minimum income tax is greater than the tax computed
under Subsection A of sec. 27 or the regular corporate income tax rate of 30% for the taxable year.
The author submits that proprietary educational institution or non-profit hospitals are subject to MCIT only
and until when the RCIT rate of 30% applies. Therefore, if the gross income from unrelated trade,

business or other activity exceeds 50% of the total gross income derived by such educational institutions
or hospitals from all sources, the tax prescribed is Subsection A shall be imposed on the entire taxable
income. And since, the said proprietary educational institution or non-profit hospitals is now subjected to
RCIT rate of 30% it can likewise now be subj. to MCIT rate of 2%. Besides the application of sec. 27E did
not exclude proprietary educational institution or non-profit hospital. Only that, provisions have to be
reconciled.
Basis of 2% MCIT
The gross income being referred to in the MCIT shall mean gross sales less sales return, discounts, and
allowances and cost of goods sold.
Cost of goods sold include all business expenses directly incurred to produce the merchandise to bring
them to their present location and use.
For trading or merchandising concern, it shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the goods are actually sold including insurance
while the goods are in transit.
For manufacturing concern, cost of goods manufactured and sold shall include all costs of production of
finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, gross income means gross receipts less sales
returns, allowances, discounts and cost of services.
cost of services shall mean all direct costs and expenses necessarily incurred to provide the services
required by the customers and clients including salaries and employee benefit of personnel, consultants
and specialists directly rendering the service and cost of facilities directly utilized iin providing the service
such as depreciation or rental of equipment used and cost of supplies: Provided however that in case of
banjs,costs of services shall include intrest expense sec.27E(4)
Carry Forward of Excess Minimum Tax sec27E(2)
Any excess of the minimum corporate income tax over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the
three (3) immediately succeeding taxable years.
Unutilized MCIT
MCIT is a tax that is creditable within 3 yr period immediately succeeding the taxable year or the excess
of the MCIT over the normal corporate income tax shall be carried forward and credited against the NCIT
for the three immediately succeeding taxable years, any tax that remained unutilzed or cannot be credited
against the NCIT for the said 3 yr. period loses its creditable (RR no.9-98)
Relief from the MCIT under certain conditions
Sec. of Finance is hereby authorized to suspend the imposition of the MCIT on any corporation which
suffers losses on account of:
1. Prolonged labor dispute, or because of

2. Force majeure, or because of

3. Legitimate bus. Reverses
Manner of filing and payment of MCIT
-it shall be paid in the same manner prescribed for the payment of the normal corporate income tax which
is on a quarterly and on a yearly basis. It shall be covered by a tax return designed for the prupose which
will be submitted together with corp. annual final adjustment income tax return. DC shall be reuired to pay
the MCIT ona quarterly basis, pursuant to the provisions of secs. 75 and 77 of the Code in realtion to sec.
245 of the same Code (RR no 12-2007)
MCIT is not a tax on capital
MCIT is imposed on gross income which is arrived at by deducting the capital sent by a corporation in the
sale of its goods, i.e the cost of goods and other direct expenses from gross sales. Clearly, the capital is
not being taxed.
Carry over Option
SEC. 76. - Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final
adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said taxable year is not equal to the total tax due on the
entire taxable income of that year, the corporation shall either:
(A)Pay the balance of tax still due; or
(B)Carry-over the excess credit; or
(C)Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes
paid, the excess amount shown on its final adjustment return may be carried over and credited against
the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years.
Once the option to carry-over and apply the excess quarterly income tax against income tax due for the
taxable quarters of the succeeding taxable years has been made, such option shall be considered
irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate
shall be allowed therefor.
-once a corp. exercise this option, such option is irrevocable for that taxable period. Having chosen to
carry-over the excess quarterly inome tax, the corporation cannot thereafter choose to apply for a cash
refund or for the issuance of a tax credit cert. for the amount representing such overpayment.
Imposition of Imporperly Accumulated Earnings Tax
The income here is the dividends derived from the corporation. The corp. earns income, this the
shareholders must likewise do. This is the return on the shareholders investment, dividends. Now, since
corporae dividends are regarded as income, it is subject to FIT. Sec. 6 of RR no. 2-2001 states that
dividends must be declared and paid or issued not later that ne yr ff. the close of the taxable year,
otherwise the IAET, if any, should be paid within 15 days thereafter.
In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the
improperly accumulated taxable income of each corporation described in Subsection B hereof, an

improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable
income.(sec.29A)
Concept of IAET
Pursuant to sec. 29 there is imposed for each taxable year, in addition to other taxes imposed under title 2
of the NIRC of 1997, a tax equal to 10% of improperly accumulated taxable income of corportations
formed or availed of for the purpose of avoiding the income ta with respect to its shareholders or the
shareholders of any corporatioin, by permitting the earnings and profits of the corporation to accumulate
instead of dividing among them or distributing them to the shareholders.
The rationale is that if the earnings and profits were distributed, the shareholder would then be liable to
income tax thereon, whereas if the distribution were not made to them, they would incur no tax in respect
to the undistributed earnings and profits of the corporation for the improper accumulation of its earnings,
and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends
tax on the earnings distributed to them by the corporation.
See Cynamid Philippines Inc. v. CA
Tax on Corporations Subject to Improperly Accumulated Earnings Tax
The imp. Acc. Earnings tax imposed in the preceding section shall apply to every corporation formed or
availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders or
any other corporation, by permitting earnings and profits to accumulate instead of being divided or
distributed.
The following are prima facieinstances of accumulation of profits beyond the reasonable needs of a
business and indicative of purpose to avoid income tax upon shareholders:

a. Investment of substantial earnings and profits of the corporation in unrelated

business or in stock or securities of unrelated business;
b. Investment in bonds and other long-term securities;
c. Accumulation of earnings in excess of 100% of paid-up capital, not otherwise
intended for the reasonable needs of the business as defined in these Regulations.
In order to determine whether profits are accumulated for the reasonable needs of the business as to
avoid the imposition of the improperly accumulated earnings tax, the controlling intention of the
taxpayer is that which is manifested at the time of accumulation, not subsequently declared
intentions which are merely the product of afterthought. A speculative and indefinite purpose will
not suffice. The mere recognition of a future problem or the discussion of possible and alternative
solutions is not sufficient. Definiteness of plan/s coupled with action/s taken towards its
consummation are essential.
The following constitute accumulation of earnings for the reasonable needs of the business:

a. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the
corporation as of Balance Sheet date, inclusive of accumulations taken from other years;
b. Earnings reserved for definite corporate expansion projects or programs requiring considerable capital
expenditure as approved by the Board of Directors or equivalent body;

c. Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors
or equivalent body;

d. Earnings reserved for compliance with any loan covenant or pre-existing obligation established under
a legitimate business agreement;
e. Earnings required by law or applicable regulations to be retained by the corporation or in respect of
which there is legal prohibition against its distribution;
f. In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended
or reserved for investments within the Philippines as can be proven by corporate records and/or relevant
documentary evidence.

Application
The 10% IAET is imposed on improperly accumulated taxable income starting Jan. 1, 1998 by DC as
defined under the tax code and which are classified as closely-held corp. provided, however, that IAET
shall not apply in the ff corp:
1. Banks and other non banks financial intermediaries
2. Insurance companies
3. Publicly-held corp
4. Taxable pat
5. GPP
6. Non taxable joint ventures
7. Enterprises registered with the PEZA
Sec. 29B(2) provides the ff exceptions:
a. Publicly held corp
b. Banks and other non bank financial intermediaries and
c.

]nsurance companies

Closely held
-are those corp. at least 50% in value of the outstanding caoital stock or at least 50% of the total
combined voting ppower of all classes of stock entitled to vote is owned direcly or indirectly by or for
not more than 20 individuals. DC not falling under the aforesaid definition are therefore publicly-held
corp.
Holding or investment company
-shall refer to a corporation having practically no activities except holding property and collecting the
income therefrom or investing the same.
Evidence of Purpose to Avoid Income Tax
1. Prima Facie Evidence

The fact that any corporation is a mere holding company or investment company shall be
prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
2. Evidence Determinative of Purpose
The fact that the earnings or profits of a corporation are permitted to accumulate beyond
the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon
its shareholders or members unless the corporation, by the clear preponderance of evidence,
shall prove to the contrary.
Improperly Accumulated Taxable Income
-The term 'improperly accumulated taxable income' means taxable income' adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year. Sec. 29D

Reasonable needs of the Business

-includes the reasonably anticipated needs of the business (sec.29E)
-An accumulation of earnings or profits (including undistributed earnings or profits of prior years)
is unreasonable if it is not necessary for the purpose of the business, considering all the circumstances of
the case. To determine the "reasonable needs" of the business in order to justify an accumulation of
earnings, these Regulations hereby adhere to the so-called "Immediacy Test" under American
jurisprudence as adopted in this jurisdiction. Accordingly, the term "reasonable needs of the business"are
hereby construed to mean the immediate needs of the business, including reasonably anticipated needs.
In either case, the corporation should be able to prove an immediate need for the accumulation of the
earnings and profits, or the direct correlation of anticipated needs to such accumulation of profits.
Otherwise, such accumulation would be deemed to be not for the reasonable needs of the business, and
the penalty tax would apply. (sec. 3 RR no.2-2001)
Period for Payment of Dividend or Payment of IAET
The dividends must be declared and paid or issued not later than one year following the close of the taxable year,
otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter
GOCC, Agencies or Instrumentalities
The provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled by the Government, except the
Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health
Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine
Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as
are imposed by this Section upon corporations or associations engaged in s similar business, industry, or
activity.

Simply put, the treatment is similar to that of DC.

The ff. are the exceptions and are not liable to pay taxes mentioned in this section:
1. GSIS
2. SSS
3. Philhealth
4. PCSO

Sec. 30 Exemptions from Tax on Corporations

The following organizations shall not be taxed under this Title in respect to income received by them as
such:
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without
capital stock organized and operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating fort he exclusive benefit of the members such as
a fraternal organization operating under the lodge system, or mutual aid association or a nonstock
corporation organized by employees providing for the payment of life, sickness, accident, or other benefits
exclusively to the members of such society, order, or association, or nonstock corporation or their
dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or
asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the
net income of which inures to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company,
mutual or cooperative telephone company, or like organization of a purely local character, the income of
which consists solely of assessments, dues, and fees collected from members for the sole purpose of
meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of
marketing the products of its members and turning back to them the proceeds of sales, less the
necessary selling expenses on the basis of the quantity of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed
under this Code.

The income exempt here is in realtion and arising from their principal conduct of business under
the commonality that the same is not for profit. Otherwise they will be taxed as ordinary corp. by
virtue of the last par.
So, any income of whatever kind or whatever nature r character derived from their activities
whether for profit or as a result thereto, incidentally for profit, is subject to tax.
Procedure for Exemption
1. file an affidavit with CIR
2. showing the character of the org. the prupose for which it was organized, its actual
activities, the sources of its income and its disposition whther or not any of its income is
credited to surplus or inures or may inure to the benefit of any private shareholder or
individual
3. all facts relating to its operation affecting its right to exemption
4. attached a copy of the charter or aticles of incorp, the by-laws of the organization, and the
latest financial statement showing assets, liabilities, receipts, and disbursement of the
organization.
See page 329 for illustration on the interpretation of sec. 30
Exchange of Property
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.

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. (sec. 40C(2))
-'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. [sec. 40(6)(C)]

Assumption of Liability (sec.40C(4))

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.

Basis of the Stocks or Securities [Sec. 40 (C)(5)]

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.

Definition of Terms under Sec. 40C(6)

(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) The3term '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.

Determination of Amount and Recognition of Gain or Loss

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. [Sec. 40A]