No Gain or Loss Recognized from the Transfer of Parcels of Land and Improvements

January 29, 1990 BIR RULING NO. 008-90 34 (c) 2 (c) 089-89 008-90 Gentlemen : This refers to your letter dated October 10, 1989 requesting confirmation of your opinion to the effect that no gain or loss shall be recognized from the transfer of parcels of land and improvements thereon by Far Eastern University, Inc. (FEU), to FERN Realty, Inc. in exchange for shares of stock of the latter corporation, and that the said transaction is not subject to donor's tax. cd It is represented that FEU is a corporation duly organized and existing under Philippine Laws; that it owns various parcels of land with improvements thereon located in Manila which it intends to transfer ownership to FERN, also a corporation organized and existing under Philippine laws and a wholly owned subsidiary of FEU, in exchange for shares of stock of FERN; that all the issued and outstanding shares of stock of FERN are owned by FEU and/or its nominee directors holding qualifying shares; that FEU will transfer the said parcels of land at the value equivalent to the latest zonal valuation thereof and then improvements at their fair market value, as appearing in the latest tax declaration; and that as a consequence, FEU will receive shares of stock of FERN with an aggregate par value equivalent to the latest zonal valuation of the parcels of land transferred and the fair market value of the improvements thereon as appearing in the corresponding tax declaration of said improvements for tax purposes. In reply, please be informed that pursuant to Section 34(c)(2)(c) of the Tax Code as amended by Republic Act No. 4522 and Presidential Decree 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., subscribed, whether for property or for services by the transferee or transferors. 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, your opinion that no gain or loss shall be recognized both to transferor corporation and the transferee corporation on the proposed transfer of Far Eastern University Inc. (FEU) of its parcels of land with the improvements thereon in exchange for shares of stock of the transferee corporation, FERN Realty, Inc., considering that as a result of said proposed exchange FEU will gain further control of FERN, the transferor corporation, is hereby confirmed. It should be noted, however, that Section 34(c)(2)(c) of the Tax Code may merely defers recognition of gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the parcels of land 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 will later sell or exchange the shares of stock acquired by it in the exchange, the same 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 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), 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 corporation must file with its 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 its interest 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: cdta 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, 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. 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 parcels of land including improvements thereon are exchanged with stocks in a corporation, as contemplated in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the deed to be executed to effect the aforesaid proposed transfer. (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982). Furthermore, under Section 248(d) in relation to Section 173 of the Tax Code, as amended by Executive Order No. 273, in case of failure to affix the proper documentary stamp to a document or instrument, there shall, for every violation, be imposed, in addition to the amount of documentary stamp tax required to be paid, an amount equivalent to 25% of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Finally, the certificates of stocks to be issued by FEU, are, in all probability, original issues which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. Only donations inter vivos are subject to donor's tax. Donation contemplates of an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it. Moreover, donative intent or intent on the part of the donor to make a gift must exist. In view thereof, considering that there is lack of donation intent on the part of the transferor, stocks of the transferee corporation (FERN), the aforementioned transaction involving the exchange of parcels of land for stocks, is therefore not subject to the donor's tax imposed by Section 91 of the Tax Code, as amended. cdi Very truly yours, (SGD.) JOSE U. ONG Commissioner