Whether the Transfer of Property in Exchange for Its Shares of Stock in Accordance with Revenue Memorandum Order No. 26-92, Falls under Section 34(c)(2) of the Tax Code, as amended

January 6, 1994 BIR RULING NO. 007-94 34 (c) (2) 324-93 007-94 KAST Manufacturing Corporation 75-B 8th Avenue Street Grace Park, Caloocan City Attention: Mr . Tan Seng President Gentlemen : This refers to your letter dated June 28, 1993 requesting in effect for a confirmation of your opinion that the transfer of property by EM Packaging & Printing Corporation in favor of your company, Kast Manufacturing Corporation in exchange for its shares of stock in accordance with Revenue Memorandum Order No. 26-92, falls under Section 34(c)(2) of the Tax Code, as amended. It is represented that Kast Manufacturing Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of P1,920,000.00 divided into 19,200 shares with a par value of P100.00 per share of which 9,600 shares were subscribed as certified by the Corporate Secretary dated June 28, 1993, as follows: Stockholder No. of Shares Amount Subscribed Subscribed Tan Seng 2,160 P 216,000.00 William G. Tan 480 48,000.00 Wilson G. Tan 480 48,000.00 Pedro Koh 1,280 128,000.00 Lelia Alpapara Sy 2,500 250,000.00 Elena C. Patdu 480 48,000.00 Rosa G. Tan 480 48,000.00 Ana Maria T. Catli 480 48,000.00 Aida G. Tan 960 96,000.00 EM PACKAGING & PRINTING CORPORATION 300 30,000.00 Total 9,600 P 960,000.00 ====== =========== That Em Packaging & Printing Corporation is the absolute and registered owner of a parcel of land and the improvements thereon situated in Barrio Calaanan, Caloocan City with an area of 931.12 square meters, and covered by Transfer Certificate of Title No. T-165756 issued by the Register of Deeds of Caloocan City; that EM Packaging & Printing Corporation, represented by its President, Mr. William G. Tan, executed a Deed of Exchange of the above-mentioned property in favor of Kast Manufacturing Corporation in exchange for its unissued shares of stock in the total amount of P950,000.00; that after the exchange, the resulting stockholdings of EM Packaging & Printing Corporation constitute at least 51% of the total voting stock of the corporation as follows: Stockholder No. of Shares Amount Subscribed Subscribed Tan Seng 2,160 P 216,000.00 William G. Tan 480 48,000.00 Wilson G. Tan 480 48,000.00 Pedro Koh 1,280 128,000.00 Lelia Alpapara Sy 2,500 250,000.00 Elena C. Patdu 480 48,000.00 Rosa G. Tan 480 48,000.00 Ana Maria T. Catli 480 48,000.00 Aida G. Tan 960 96,000.00 EM PACKAGING & PRINTING CORPORATION 9,800 980,000.00 Total 19,100 P1,910,000.00 ====== ============ that in support of your request, you submitted to this Office photocopies of the following documents: (a) deed of exchange; (b) articles of incorporation duly registered with the SEC of the transferee & transferor corporations; (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 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, please be informed that pursuant to Section 34, paragraph (c)(2) 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 these 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 EM Packaging & Printing Corporation of its property in exchange for shares of stock of the transferee corporation, Kast Manufacturing Corporation, 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) 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 of historical cost of the properties or stocks is considered. Thus, if the transferee later sells or exchanges the shares of stock acquired by it in the exchange, it shall be subject to insure 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 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) 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 transaction 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/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 from the transferor; 2. A statement of the original acquisition cost on 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 transferors 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, 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 of 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. Finally, the certificate of stocks to be issued by Kast Manufacturing 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, Kast Manufacturing 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 the ruling shall be considered null and void. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue