Tax Consequence of the Proposed Transfer by Mercelle's Incorporated of a Parcel of Land in Favor of Gimbec Realty Corporation (Gimbec) in Exchange for Shares of Stock of the Latter

January 29, 1991 BIR RULING NO. 010-91 34 (c) (2) (c) 030-90 010-91 Gentlemen : This refers to your letter dated October 2, 1990 requesting a ruling on the tax consequence of the proposed transfer by Mercelle's Incorporated of a parcel of land in favor of Gimbec Realty Corporation (Gimbec) in exchange for shares of stock of the latter. cdti It is represented that Gimbec is a domestic corporation registered with the Securities and Exchange Commission; that it has an authorized capital stock of P5,000,000.00 which is divided into 50,000 shares with a par value of P100.00 per share; that of its authorized capital stock, P2,000,000.00 has been actually subscribed and P1,000,000.00 paid in subscription; that the incorporators of said corporation and the respective number of shares subscribed and paid-up are as follows: Names No. of Amount Amount Paid on Shares Subscribed Subscription 1. Jose L. Cuayong 5,000 P500,000.00 P250,000.00 2. Rosario L. Cuayong 5,000 500,000.00 250,000.00 3. Criselda Montinola 4,000 400,000.00 200,000.00 4. Elizabeth Reyes 2,500 250,000.00 125,000.00 5. Federico Montinola, Jr. 2,500 250,000.00 125,000.00 6. Magdalena Montinola 1,000 100,000.00 50,000.00 20,000 P2,000,000.00 P1,000,000.00 ===== ========== ========= that Mercelle's Incorporated is the true, lawful and registered owner of a parcel of land situated at Imelda Avenue, Bel-Air Village, Makati, Metro Manila, covered by the T.C.T. No. 166970; that the said property was allegedly bought by Mercelle's Incorporated from Mr. John Tiong for P1,500,000.00 although the fair market value thereof as appearing in Tax Declaration No. B-002-04191 is only P328,300.00; that Mercelle's Incorporated will transfer said property for 25,500 shares of stock of Gimbec worth P2,500,000.00; that after the exchange, Mercelle's Incorporated will own more than fifty-one percent (51%) of the total issued and outstanding shares of Gimbec. 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, no gain or loss shall be recognized both to the transferor and the transferee corporation on the proposed transfer by Mercelle's Incorporated of its real properties in exchange for shares of stock of Gimbec considering that after the proposed exchange of properties and as a result of the proposed exchange, the transferor will gain control of the transferee corporation. 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 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 properties exchanged therefore; and that the cost basis to the transferee of the properties 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]. cdtech In this connection, you are further advised that in order that the parties to the proposed 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 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, 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 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 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. The parties shall also cause to be annotated on the Transfer Certificate of Titles and at the back of 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 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 to be executed to effect the aforesaid transfer (BIR Ruling No. 109-82 dated April 6, 1982). The value shall be the fair market value which shall not be less than the par value of the stocks. 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 stamps 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 twenty-five percent (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 Gimbec Realty 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. Should the aforementioned proposed transaction materialize and after payment of the corresponding documentary stamp tax, the aforesaid real properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, Gimbec Realty Corporation. Considering that the aforementioned proposed transaction is not a sale, the same is not subject to the 5% creditable withholding tax under Revenue Regulations No. 1-90. 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. cd Very truly yours, (SGD.) JOSE U. ONG Commissioner