Whether the Proposed Transfer of Real Properties Consisting of a Parcel of Land, Including All Improvements Thereon in Exchange for Shares of Stock in Accordance with Revenue Memorandum Order No. 26-92, Falls Within the Purview of Section 34(c)(2)(c) of the Tax Code, as amended

January 6, 1994 BIR RULING NO. 003-94 34 (c) (2) & (6) (c) 439-93 003-94 Mr. Delfin C. Gonzalez, Jr. 350 Dama de Noche Street Ayala Alabang Village Muntinlupa, Metro Manila S i r : This refers to your letter dated November 12, 1993 requesting confirmation of your opinion that the proposed transfer of real properties consisting of a parcel of land, including all improvements thereon, owned by spouses Delfin C. Gonzalez, Jr. and Roseanne I. Gonzalez, in exchange for shares of stock of D. C. Gonzalez, Inc., in accordance with Revenue Memorandum Order No. 26-92, falls within the purview of Section 34(c)(2)(c) of the Tax Code, as amended. cdta It is represented that D.C. Gonzalez, Inc. (DCGI) is a domestic corporation duly registered with the Securities & Exchange Commission; that it has an authorized capital stock of P100,000.00 divided into 1,000 common shares with a par value of P100.00 per share; that of the authorized capital stock of the corporation, P25,000.00 has been actually subscribed and fully paid; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up, viz.: Name No. of Amount Percentage shares Paid Delfin C. Gonzalez, Jr. 125 P 12,500.00 50.0 Roseanne I. Gonzalez 22 12,200.00 48.8 Agnes S. Itchon 1 100.00 0.4 Nicolette I. La'O 1 100.00 0.4 Rogelio C. La'O 1 100.00 0.4 Total : 250 P 25,000.00 100.0% ==== ========== ====== that during the meeting of the Board of Directors of DCGI on August 8, 1993, the capital stock of the corporation was increased to P13,700,000.00 divided into 137,000 common shares all with par value of P100.00 per share which was approved on the same date by the stockholders representing at least two-thirds (2/3) of the subscribed capital stock; that the spouses Delfin C. Gonzalez, Jr. and Roseanne I. Gonzalez are the absolute and exclusive owners of a parcel of land, including all improvements thereon, with original acquisition cost of P3,400,000.00 situated in Bo. Ugong, Pasig, Metro Manila and covered by Transfer Certificate of Title No. 30412; that the said spouses intend to transfer/assign the aforesaid real property in exchange for 34,000 common shares to the increased capital stock of DCGI, with par value of P3,400,000.00 broken down as follows: Names No. of Shares Par Value Delfin C. Gonzalez, Jr. 17,000 P1,700,000 Roseanne I. Gonzalez 17,000 1,700,000 that after the said transfer, the stockholdings of the stockholders will be as follows: Names No. of Amount Percentage Shares Paid Delfin C. Gonzalez, Jr. 17,125 1,712,500.00 50.0 Roseanne I. Gonzalez 17,122 1,712,200.00 50.0 Agnes S. Itchon 1 100.00 * Nicolette I. La'O 1 100.00 * Rogelio C. La'O 1 100.00 * Total : 34,250 3,425,000.00 100.0% ===== ======== ===== and that as a result of the exchange, spouses Delfin C. Gonzales, Jr. and Roseanne I. Gonzalez will gain further control of the corporation by owning more than 51% of the total voting power of all classes of stocks entitled to vote. cdt Furthermore, you are requesting confirmation of your following opinions that "1. That assets may be transferred by the spouses to DCGI at cost or market value without affecting the tax-free character of the transfer; "2. Documentary stamp tax is due on the transfer of real properties by the spouses which shall be based on the par value of the shares of DCGI to be received in the exchange; and, "3. The certificates of stocks to be issued by DCGI are subject to documentary stamp tax, being original issues, pursuant to Section 178 of the Tax Code. In reply thereto, please be informed that pursuant to Section 34 (c)(2) and (6)(c) of the Tax Code, as amended by Republic Act No. 4522 and P.D. Nos. 1705 and 1773, no gain or loss shall be recognized if property is transferred to a corporation by a person, in exchange for stock in such 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 stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stocks received i.e., total subscribed, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stocks in the same transaction may be counted up to a maximum of five. Accordingly, your opinion that no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by spouses Delfin C. Gonzalez, Jr. and Roseanne I. Gonzalez of their property in exchange for shares of stock of the transferee corporation, D.C. Gonzalez, Inc. considering that as a consequence of the exchange, spouses Delfin C. Gonzalez, Jr. and Roseanne I. Gonzalez gained control of the transferee corporation by owning 98.8% of the total voting stock of the corporation, is hereby confirmed. It should be emphasized, however, that Section 34(c)(2) and (6)(c) of the Tax Code merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by them in the exchange, they shall be subject to income tax on gains derived from such sale or exchange, taking into consideration that the cost basis of the shares shall be the same as the original acquisition cost or adjusted cost basis to the transferors of the property exchanged therefor; and that the cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferors. (Section 34(c)(5)(a) and (b) of the Tax Code, as amended by Presidential Decree No. 1773). In this connection, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gains provided for in Section 34(c)(2) and (6)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned: a. the transferors must file with their income tax return for the taxable year in which the exchange transaction was consummated, a complete statement of all facts pertinent to the exchange, including: 1. A description of the property transferred, or of their interest in such property, with a statement of the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer; 2. The kind of stocks received and preferences, 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 transferors; 2. A statement of the original acquisition cost or other basis of the property in the hands of the transferors and the adjusted cost basis thereof at the time of the transfer; and 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 stocks and number of shares issued to the transferors in the exchange; and c. The fair market value as of the date of the exchange of the capital stock issued to the transferors. In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers 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/properties received in the exchange. The parties shall also cause to be annotated on the Transfer Certificate of Title and at the back of the Certificate of Stocks, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange. Moreover, pursuant to Section 196 of the Tax Code, as amended, a conveyance or deed whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for such realty. A stock in a corporation is a valuable consideration for transfer of real property. (Section 177, Documentary Stamp Tax Regulations). Accordingly, if a parcel of land, is exchanged with stocks in a corporation as in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the Deed of Assignment executed to effect the aforesaid transfer (BIR Ruling No. 245-00-000-00-109-82 dated April 06, 1982). The value shall be the fair market value which shall not be less than the par value of the stocks. Furthermore, the certificate of stocks to be issued by D.C. Gonzalez, Inc. are, in all probability original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. After payment of the corresponding documentary stamp tax, the real property may be registered by the Register of Deeds concerned in the name of the transferee D.C. Gonzalez, Inc. Finally, the assets may be transferred by spouses Delfin C. Gonzalez, Jr. and Roseanne I. Gonzalez to DCGI at cost or market value without affecting the tax-free character of the transfer because as heretofore stated for purposes of determining the gain or loss from a subsequent disposition, sale or exchange of the parcels of land or of the stocks acquired as a result of the exchange, the original or historical cost of the properties or the stocks shall be considered. (BIR Ruling No. 34(c)(2)(c)-85-90-221-90 dated November 27, 1990; 216-91; 217-91; 222-91) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. cdti Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue