Tax Implications of Assignment of Properties to the Corporation in Payment for the Unpaid Subscription to the Capital Stock of the Corporation

January 5, 1983 BIR RULING NO. 004-83 This refers to your letter dated October 18, 1982 requesting a ruling on behalf of your clients, the spouses Dr. Mamerto R. Cuesta and Mrs. Remedios Ll. Cuesta who are the controlling stockholders of the Victoria Santo Tomas Development Corporation, on the following queries: "1. Would the assignment of properties to the corporation in payment for the unpaid subscription to the capital stock of the corporation be subjected to the capital gains tax? "2. Insofar as the registration fee, transfer tax, assurance fund and other legal expenses are concerned, what would be the basis for the Register of Deeds of Baguio City: the assessed value of properties as shown in the tax declaration, or the amount indicated in the Deed of Assignment? "3. How much documentary stamps would be affixed on the Deed of Assignment?" Documentary evidence submitted shows that Victoria Santo Tomas Development Corporation was incorporated on August 25, 1982 with an authorized capital stock of One Million Six Hundred Thousand Pesos (P1,600,000.00) divided into 16,000 shares at a par value of P100.00 per share; that the following are the incorporators with the number of their shares subscribed and paid up, viz: Amount of No. of Capital Shares Stock Amount Names Subscribed Subscribed Paid 1. Remedios Ll. Cuesta 3,600 360,000 P90,000 2. Mamerto R. Cuesta 100 10,000 2,500 3 Anita C. Peleo 100 10,000 2,500 4. Araceli C. Gimeno 100 10,000 2,500 5. Frances Ll. de la Cuesta 100 10,000 2,500 4,000 400,000 100,000 ===== ====== ====== that in payment for their unpaid subscription of 2,775 shares of the Victoria Santo Tomas Development Corporation, worth P277,500.00 Remedios Ll. Cuesta and Mamerto Cuesta executed on October 25, 1982, a Deed of Assignment of several parcels of land covered by TCT No. T-31631 (Lot No. 1, Tsi-V-592-D; Lot No. 2, Tsi-V-592-D) and TCT No. T-10684 all situated in the City of Baguio in favor of Victoria Santo Tomas Development Corporation. In reply, please be informed as follows: 1. Pursuant to Section 35, paragraph (c)(2)(c) of the Tax Code, as amended by Republic Act No. 4522 and Presidential Decrees 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. The term "control" shall mean ownership of stocks in a corporation possessing at least fifty one (51%) per cent of the total voting power of all classes of stocks entitled to vote. In determining the 51% stock ownership, only those persons who transferred property for stock in the same transaction may be counted, up to a maximum of five. Accordingly, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by the spouses Remedios Ll. Cuesta and Mamerto R. Cuesta of their real properties in payment of their unpaid subscription of stock in Victoria Santo Tomas Development Corporation, considering that after the exchange of properties and as a result of the said exchange, the transferors maintained and gained further control of the said corporation. aisadc It should be emphasized, however, that Section 35(c)(2)(c) 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 properties or of the stocks involved in the exchange, the original or historical cost of the properties or the stocks is considered. Thus, if the transferors later sell or exchange the shares of stock acquired by them in exchange, they shall be subject to income tax on the gains derived from such sale or exchange, taking into consideration that the cost basis of the shares of stock shall be the same as the original acquisition cost or adjusted cost basis to the transferors of the properties exchanged therefore; and that the cost basis to the transferee of the properties exchanged for stock shall be the same as it would be in the hands of transferors. (Section 35(c)(5)(a) & (b), NIRC as amended by P.D. 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 35(c)(2)(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 was consummated a complete statement of all facts pertinent to the exchange, including: (1) A description of the properties transferred, or of their interests in such properties, 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 all properties received from the transferors; (2) A statement of the original acquisition cost or other basis of the properties 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 stock and number of shares issued to the transferors in the exchange; and (c) The fair market value as of the date of 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. cdt 2. The basis to the Register of Deeds of Baguio City for the registration fee, transfer tax, assurance fund and other legal expenses, is a matter not within the province of this Office to decide. 3. Pursuant to Section 245 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 properties. (Sec. 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 due on the aforesaid deed. (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982) Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner Bureau of Internal Revenue