BIR Ruling

June 10, 1976 Tax Consequences of Transfer of Real Property in Exchange of Shares of Stocks This refers to your letter dated April 4, 1977 requesting a ruling in behalf of your client, Progressive Development Corporation, as to the tax consequence of a transaction described as follows: STATEMENT OF FACTS "Progressive Development Corporation, a corporation, owns several real properties, one of which is a Commercial Center (land and building) with a book value of P13,089,000.00 but with an appraised value of P92,212,500.00. "PDC will assign the Commercial Center (land and building) to the Treasurer-in-Trust of FPC Inc. (while it is in the process of incorporation), solely in exchange for P92,212,500.00 worth of shares of stock of FPC Inc., as a result of which PDC will wholly own FPC Inc. FPC Inc. shall be a stock condominium corporation organized in accordance with the Condominium Law. After FPC Inc. is registered with the Securities and Exchange Commission, PDC will sell its shares of stock in FPC Inc. to the public, including some 493 tenants of the Commercial Center. Purchase of certain number of shares will entitle purchaser to the ownership of a definite unit of the condominium building." QUESTIONS PRESENTED "1. Is the transfer by PDC of the Commercial Center (land and building) in exchange for stocks of FPC Inc. taxable? "2. Is PDC subject to the capital gains tax on the proceeds of the sale of its FPC Inc. shares to the tenants and to the public or only to the stock transfer tax?" techcd In reply thereto, I have the honor to inform you that pursuant to Section 35 Paragraph (c)(2)(c) of the Tax Code as amended by R.A. No. 4522, no gain or loss shall 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. The term "control" shall mean ownership of stock in a corporation possessing at least fifty-one (51%) percent of the total voting power of all classes of stocks entitled to vote. Accordingly, no gain or loss shall be recognized on the transfer by your client, Progressive Development Corporation (PDC) of a commercial center (land and building) in exchange for shares of stock of the FPC Inc. it appearing that after the exchange your client will gain control of the corporation by owning 100% of the total voting power of all classes of stocks entitled to vote. It should be emphasized, however, that Section 35(c)(2) of the Tax Code merely defers recognition of gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the property or of the stocks involved in the exchange, the original or historical cost of the property or the stocks is considered. Thus, the basis of the stocks received by the Progressive Development Corporation shall be the same as the basis of the property exchanged therefor, and the basis of the property transferred in the hands of FPC Inc. shall be the same as it would be in the hands of Progressive Development Corporation. (Section 35(c)(4) of the Tax Code. No gift tax is payable under the abovementioned transaction since the transferor will receive in exchange for its properties transferred, stocks of an equivalent value. Neither is the transferee corporation subject to the stock transaction tax imposed by Republic Act No. 6141, as amended, the stocks involved in the transaction being original issues. asiacd It should be understood, however, that if Progressive Development Corporation later sells to the public, including some 493 tenants of the commercial center the shares of stock acquired it in the exchange, it shall be subject to income tax on the gains derived from such sale and not to the % of 1% stock transfer tax pursuant to the proviso in Section 195-B of the Tax Code reading "Provided, That in case of gain not arising from but realized out of the said stock transaction, the pertinent provisions of this Code shall apply." and the cost of said shares of stock shall be the same as the original acquisition cost or adjusted cost basis to Progressive Development Corporation of the property exchanged therefor. In this connection, you are further advised that in order that the parties to the exchange can avail of the privilege provided for in Section 35(c)(2) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned. (a) The transferor must file with its income tax return for the taxable year in which the exchange was consummated a complete statement of all facts pertinent to the exchange, including: (1) A description of the property transferred, or of its interest in such property, together with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfer; (2) The kind of stock received and preference, if any; (3) The number of shares of each class received; and (4) The fair market value per share of each class at the date of the exchange. (b) On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the following: (1) A complete description of the property received from the transferor; (2) A statement of the original acquisition cost or other basis thereof in the hands of the transferee and adjusted cost basis at the time of the transfer; (3) Information with respect to the capital stock of the corporation, including: (a) The total issued and outstanding capital stock immediately prior to and immediately after the exchange, with a complete description of each class of stock; (b) The classes of stock and number of shares issued to the transferor in the exchange; and (c) The fair market value of the capital stock as of the date of exchange which was issued to the transferor. In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayer participating in the exchange showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of stocks received in the exchange. cdtech