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. 008-94 34 (c) (2) & (6) (c) 441-93 008-94 De Borja Medialdea ATA Bello Guevarra and Serapio Ground Floor Greenbelt Mansion Perea St., Legaspi Village Makati, Metro Manila Attention: Atty . Pablo A . de Borja and Atty . Edward S . Serapio Gentlemen : This refers to your letter dated May 31, 1993 requesting in effect, a confirmation of your opinion that no gain or loss is recognized on the transfer of real property by Rizadel Realty Corporation (Rizadel for brevity) to Flora Arts Philippines, Inc. (Flora for brevity) in exchange for its shares of stock in accordance with Revenue Memorandum Order No. 26-92, and falling under Section 34(c)(2) and (6)(c) of the Tax Code, as amended. It is represented that Flora Arts Philippines, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Four Million Pesos (P4,000,000.00) Philippine Currency divided into Four Hundred Thousand (400,000) shares with a par value of Ten Pesos (P10.00) per share; that the number of share outstanding is 350,000; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up viz: Amount Subscribed/ Stockholders Paid-Up % Jesus M. Pineda, Jr. P3,205,010.00 91.5 Rizalino L. Mendoza 90,000.00 2.6 Antonio R. Mendoza 85,000.00 2.4 Maritess M. Pineda 9,000.00 .3 Ma. Margarita M. Pineda 960.00 .02 Corazon Zarate 10.00 .01 Gregorio Santiago 10.00 .01 Xavier Development Corp. 80,000.00 2.2 Filrice Marketing and Sales, Inc. 30,000.00 .9 Luis Paolo Pineda 10.00 .01 Total P3,500,000.00 99.94 ============ ====== that Rizadel is the registered owner of parcel of land and building covered by Transfer Certificate of Title No. 26335 issued by the Register of Deeds of Metro Manila, District II with a total appraised value of P13,000,000.00; that on June 16, 1993, Rizadel executed a Deed of Assignment of Real Property in favor of Flora whereby the transferor will subscribe 1,300,000 shares of stock with a total par value of P13,000,000.00; that as a result of the said exchange, the transferor will gain control of the corporation by owning more than 51% of the total voting power of the transferee corporation; that after the proposed exchange, the capital structure of Flora shall be: Amount Subscribed/ Stockholders Paid-Up % Rizadel Realty Corp. P13,000,000.00 78.8 Jesus M. Pineda, Jr. P3,205,010.00 19.4 Rizalino L. Mendoza 90,000.00 .6 Antonio R. Mendoza 85,000.00 .5 Maritess M. Pineda 9,000.00 .03 Ma. Margarita M. Pineda 960.00 .01 Corazon Zarate 10.00 .01 Gregorio Santiago 10.00 .01 Xavier Development Corp. 80,000.00 .4 Filrice Marketing and Sales, Inc. 30,000.00 .13 Luis Paolo Pineda 10.00 .01 Total P16,500,000.00 99.90 ============= ===== that in support of your request, you submitted to this Office, the following documents: 1) Deed of Exchange; 2) Articles of Incorporation of Rizadel; 3) Articles of Incorporation of Flora Arts; (c) Copy of the Transfer Certificate of Title and Tax Declarations; 5) Certification as to the original or historical cost of the property; 6) Certification as to fair market value of the property (Appraisal Report); 7) Certification by Corporate Secretary of Flora Arts of its capitalization and par value of the shares; and 8) Certification of percentage of ownership of the shares of stock by the transferor as a result of the transaction. In reply thereto, please be informed that pursuant to Section 34, paragraphs (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. cdtech Accordingly, your opinion that no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by Rizadel Realty Corporation of its property in exchange for shares of stock of the transferee corporation, Flora Arts Philippines, 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) and (6)(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 of historical cost of the properties or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by it in the exchange, it 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 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) and (6)(c) 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, 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 the property received from the transferor; 2. A statement of the original acquisition cost on other basis of the property 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. The parties shall also cause to be annotated on the Transfer Certificate of Title 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 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 Flora Arts Philippines, 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 property may be registered by the Register of Deeds concerned in the name of the transferee corporation, Flora Arts Philippines, 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. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue