REPUBLIC ACT NO. 4522 - AN ACT
EXEMPTING FROM DETERMINATION OF GAIN OR LOSS ANY EXCHANGE OF PROPERTY
FOR STOCKS IN CORPORATIONS UNDER CERTAIN CONDITIONS, AMENDING FOR THE
PURPOSE PARAGRAPHS TWO, THREE AND FIVE, SUBSECTION (c), SECTION
THIRTY-FIVE OF NATIONAL INTERNAL REVENUE CODE, AS AMENDED
Section 1. Paragraphs two, three and five, subsection (c),
Section thirty-five of Commonwealth Act Numbered Four hundred and
sixty-six as amended, otherwise known as the National Internal Revenue
Code, are further amended to read as follows:
"(2) Exceptions. — 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, (b) a shareholder exchanges stocks 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 another corporation, a
party to the merger or consolidation. No gain or loss shall also be
recognized if a person exchanges his property for stock in a
corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four 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, a
shareholder, security holder or corporation receives not only stock or
securities permitted to be received without recognition of gain or
loss, but also money and/or other 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 the 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 a dividend to the shareholder an
amount of the gain recognized not in excess of his ratable 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 (1) if the corporation
receiving such money and/or other property distributed it in pursuance
to the plan of merger or consolidation, no gain to the corporation
shall be recognized from the exchange, but (2) 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.
"(c) If the taxpayer, in connection with the
exchanges described in the foregoing exception, 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 a
part of the consideration, another party to the exchange assumes a
liability of the taxpayer, or acquires from the property subject to a
liability, than 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.
"(5) 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; (1) the ordinary merger
or consolidation, or (2) 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
transactions 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 per cent of the total voting power of all classes of stocks
entitled to vote.
"(d) The Commissioner of Internal Revenue is hereby
authorized to issue rules and regulations for the purpose of
determining the proper amount of transferred assets which meet the
standard of the phrase 'substantially all' and for the proper
implementation of this section."
Sec. 2. This Act shall take effect upon its
approval.
Approved: June 19, 1965
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