Transfer of Land for Stocks Tax-Free Exchange

January 14, 1993 BIR RULING NO. 005-93 TRANSFER OF LAND FOR STOCKS TAX-FREE EXCHANGE (C) 292-92 005-93 NGAW & Lauron Law Offices Suite 1014, State Centre 333 J. Luna St., Binondo Manila Attention: Atty . Jose Ngaw This refers to your letter dated October 1, 1992 requesting confirmation of your opinion that the transfer of real properties by Mr. Andres Co, Sr. in favor of your client, Rescon Realty & Development Corporation, in exchange for its 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 Rescon Realty & Development Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of P2,000,000.00 divided into 20,000 shares with a par value of P100.00 per share, of which 5,000 shares were subscribed and paid as follows: cdaia Name No. of Shares Subscribed Andres Co, Sr. 1,300 P130,000.00 Go Suan Tee 1,300 130,000.00 Johnny G. Co 640 64,000.00 Nancy Co Herrin 640 64,000.00 Andres Co, Jr. 560 56,000.00 Juanita Co Shia Sy 280 28,000.00 Anderson D. Co 280 28,000.00 Total 5,000 P500,000.00 ==== ========= that Mr. Andres Co, Sr. is the absolute and registered owner of three (3) parcels of land all located at Pasay City consisting of 283.18, 1,422.35 & 471.72 square meters, covered by TCT Nos. 23150, 14360 and 14358 respectively, issued by the Registry of Deeds of Pasay City; that on September 23, 1992, Deeds of Assignment were executed by and between Mr. Andres Co, Sr. and Rescon Realty & Development Corporation whereby the former transferred to the latter the above-mentioned properties in exchange for additional 8,674 original/unissued shares of stock of the said corporation; that as a result of the above transaction, Mr. Andres Co, Sr. gained control of the corporation, by owning at least 51% of the subscribed capital stock of the corporation, as follows: Name No. of Shares Subscribed Andres Co, Sr. 9,974 P997,400.00 Go Suan Tee 1,300 130,000.00 Johnny G. Co 640 64,000.00 Nancy Co Herrin 640 64,000.00 Andres Co, Jr. 560 56,000.00 Juanita Co Shia Sy 280 28,000.00 Anderson D. Co 280 28,000.00 Total 13,674 P1,367,400.00 ==== ========== incorporation duly registered with the SEC of the transferee corporation; (c) copies of the transfer certificates of title and the corresponding tax declarations; (d) certification as to the original or historical cost of acquisition/adjusted cost basis of the properties 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 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 Mr. Andres Co, Sr. of his properties together with the improvements thereon in exchange for shares of stock of the transferee corporation, Rescon Realty & Development Inc., considering that as a consequence of the exchange, the transferor 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 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 him in the exchange, he 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 same as the original acquisition cost or adjusted cost basis to the transferor 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 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, together 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. cd i 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 transferor; 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 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, pertinent 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 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 transaction. (BIR Ruling No. 245-00-000-00-109-88 dated 06 April 1988). 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 to Rescon Realty & Development Corporation 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, Rescon Realty & Development Corporation. 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