Transfer of Land for Stocks Tax-Free Exchange

January 14, 1993 BIR RULING NO. 004-93 TRANSFER OF LAND FOR STOCKS TAX-FREE EXCHANGE (c) 292-92 004-93 Mr. Antonio Aragon 7th Floor, Pacific Star Building Makati Avenue, Makati, Metro Manila This refers to your letter dated 23 October 1992 requesting in effect, a confirmation of your opinion that your transfer of a parcel of land in First Consolidated Assets Development, Inc. in exchange for the latter's shares of stock in accordance with Revenue Memorandum Order No. 26-92, falls under Section 34(c)(2)(c) of the Tax Code, as amended. It is represented that First Consolidated Assets Development, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission; that the authorized capital stock of the said corporation was increased from P400,000.00 to P5,000,000.00 divided into 500,000 shares with a par value of P100.00 per share, of which 1,000 shares were subscribed and paid as follows: Stockholder No. of Stocks Total Amount Amount Paid Ma. Paz Vita Balagot Silvestre 796 P79,600.00 P79,600.00 Antonio Aragon 100 10,000.00 10,000.00 Aida Medina Aragon 100 10,000.00 10,000.00 Emmanuel Silvestre 1 100.00 100.00 Benjamin V. Abela 1 100.00 100.00 Ma. Cynthia G. Mechaca 1 100.00 100.00 Reginaldo L. Hernandez 1 100.00 100.00 1,000 P100,000.00 P100,000.00 ==== ========= ========= that you are the absolute and registered owner of a parcel of land located at San Lorenzo Village, Makati, Metro Manila and covered by TCT No. 88586 and declared under Tax Declaration No. B-027-03086; that on 22 October 1992, a Deed of Exchange was executed between you and First Consolidated Assets Development, Inc., whereby you transferred to the latter the above-mentioned properties in exchange for 47,500 shares with a total par value of P4,750,000.00; that after the exchange, the resulting stockholdings of Mr. Antonio Aragon constitute at least 98.35% of the voting stocks of the corporation as follows: cd i Stockholder No. of Stocks Amount Paid Ma. Paz Vita Balagot Silvestre 796 P 79,600.00 Antonio Aragon 24,100 2,410.000.00 Aida Medina Aragon 23,600 2,360.000.00 Emmanuel Silvestre 1 100.00 Benjamin V. Abela 1 100.00 Ma. Cynthia G. Mechaca 1 100.00 Reginaldo L. Hernandez 1 100.00 48,500 P4,850,000.00 ===== ========== that in support of your request, you submitted to this Office photocopies of the following documents: (a) deed of assignment; (b) articles of incorporation duly registered with the SEC of the transferee corporation; (c) copies of the corresponding tax declaration; (d) certification as to the original or historical cost of acquisition/adjusted cost basis of the property transferred; (e) certification by the corporate secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stock; (f) certification of percentage of ownership of the shares of stock by the transferor as a result of the transaction; and (g) other pertinent documents. In reply thereto, I have the honor to inform you that pursuant to Section 34, paragraph (c)(2)(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 the 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 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 same transaction may be counted up to a maximum of five. Accordingly, your opinion that no gain or loss shall be recognized both to you and the transferee corporation on the transfer of your properties in exchange for shares of stock to the transferee corporation, First Consolidated Assets Development, Inc., considering that as a consequence of the exchange, you gained control of the transferee corporation, is hereby confirmed. It should be emphasized, however, that Section 34(c)(2)(c) of the Tax Code merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties of stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by him in the exchange, he shall be subject to income tax on gains derived from such sales 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 transferor of the properties exchanged therefore; and that the cost basis to the transferee of the properties exchanged for stocks shall be the same as it would be in the hands of the transferor. (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)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned: a. The transferor must file with his 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 properties transferred, or of his interest in such properties, 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 all properties received; 2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferor 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 transferor in the exchange; and casia c. The fair market value as of the date of the exchange of the capital stock issued to the transferor. 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 Titles 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 of 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. Finally, the certificate of stocks to be issued by First Consolidated Assets Development, 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 properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, First Consolidated Assets Development, Inc. 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. JOSE U. ONG Commissioner of Internal Revenue