Whether the Transfer of Property in Exchange for Shares of Stock Falls under Section 34(c)(2) of the Tax Code

January 6, 1994 BIR RULING NO. 009-94 34 (c) (2) & (6) (c) 441-93 009-94 Quisumbing Torres & Evangelista 11th Floor, Pacific Star Building Makati Ave. cor. Sen Gil J. Puyat Ave. Makati, Metro Manila Attention: Atty . Edgardo M . de Vera and Atty . Zeus B . Librojo Gentlemen : This refers to your letter dated October 15, 1992 requesting in effect for a confirmation of your opinion that no gain or loss is recognized on the transfer of real properties of Ms. Paz O. Montalvan to the Veissberg Holding Corporation in exchange for its shares of stock pursuant to Section 34 (c)(2) and (6)(c) of the Tax Code, as amended. It is represented that the Veissberg Holding Corporation is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of One Hundred Thousand Pesos (P100,000.00) Philippine Currency consisting of One Thousand (1,000) shares with a par value of One Hundred Pesos (P100.00) per share; that the incorporators of the corporation, with the corresponding number of shares subscribed and paid-up are as follows: cdti Name No. of Amount Amount Shares Subscribed Paid Jesus Montalvan 50 P5,000.00 P1,250.00 Paz Montalvan 50 5,000.00 1,250.00 Milagros M. Lorenzo 50 5,000.00 1,250.00 Jose J. Montalvan 50 5,000.00 1,250.00 Mario J. O. Montalvan 50 5,000.00 1,250.00 Total 250 P25,000.00 P6,250.00 ====== ========== ======= that Ms. Paz O. Montalvan is the absolute owner of four (4) parcels of land together with the improvement thereon valued at P504,000.00 located in Cebu City and covered by Transfer Certificate of Title No. 1837, 1838, 1839 and 1840 issued by the Register of Deeds of Cebu City; that the authorized capital stock of the corporation will be increased to P5,000,000.00, consisting of 50,000 common shares at par value of P100.00 per share; that she will subscribe to P4,816,600.00 of the increased authorized capital stock of the corporation or to 48,166 shares of the common stock with par value of P100.00 per share; that she will transfer the properties to complete payment for her unpaid subscriptions and fully pay for her subscription to the increased capital stock; that the other shareholders will not subscribe to the increased capital stock; that a Deed of Assignment of Real Estate in Payment of Subscription was executed by and between Ms. Paz O. Montalvan and Veissberg Holding Corporation whereby the former assigns to the latter the abovementioned properties in exchange for her unpaid subscription to the capital stock of the corporation; that as a result of the subscription in the increased capital stock of the corporation in exchange for the properties, Ms. Paz O. Montalvan will have a total subscription of P4,821,600.00 of the capital stock of the corporation or 99% of the outstanding capital stock and thereby gain control of the corporation; that after the said subscription, the stockholdings in the corporation will be as follows: Name Subscribed Capital Stock Paid In Paz O. Montalvan P4,821,600.00 P4,821,600.00 Jesus J. Montalvan 5,000.00 1,250.00 Milagros M. Lorenzo 5,000.00 1,250.00 Jose J. Montalvan 5,000.00 1,250.00 Mario J. O. Montalvan 5,000.00 1,250.00 Total P4,841,600.00 P4,826,600.00 =========== ============ and that in support of your request, you submitted to this Office, the following documents: 1) Deed of Assignment of Real Estate in Payment of Subscription; 2) Articles of Incorporation and By-Laws of Veissberg Holding Corporation; 3) Transfer Certificate of Title; 4) Tax Declaration; 5) Certification as to the original cost of acquisition of the properties transferred; 6) Certification of the zonal value of the properties involved in the exchange; 7) Certification of the Treasurer-in-Trust of Veissberg Holding Corporation of its authorized capital stock and the par value of the shares of stock; 8) Certification of the percentage of ownership of the shares of stock by the transferor as a result of the transaction; and 9) Other pertinent documents. In reply thereto, please be informed that pursuant to Section 34 (c)(2) and (6)(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 Ms. Paz O. Montalvan of her properties in exchange for shares of stock of the transferee corporation, Veissberg Holding Corporation, considering that as a consequence of the exchange, Ms. Paz O. Montalvan gained control of the transferee corporation, is hereby confirmed. It should be emphasized, however, that Section 34(c)(2) & (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 or historical cost of the properties or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by her in the exchange, she 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) & (6)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned. a. The transferor must file with her 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 her 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 or 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 Condominium 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. aisadc 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 Veissberg Holding 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 property may be registered by the Register of Deeds concerned in the name of the transferee corporation, Veissberg Holding 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. cdt Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue