Tax Consequence of the Transfer of Respective Interests in Real Estate Properties

January 14, 1987 BIR RULING NO. 011-87 35-c-2 163-86 011-87 Gentlemen : This refers to your letters dated October 29 and November 18, 1986 requesting a ruling on the tax consequence of the transfer by your clients, the heirs of the late Onofre M. Pantig, namely: the surviving spouse, Josephine Vergara Vda. de Pantig and legitimate children, Teresita P. Buensuceso, Angelina P. Trivett, Stephanie P. Izquierdo, Daniel, Joffre, Alphonse and Victor, all surnamed V. Pantig, of their respective interests in real estate properties in favor of the Pantig Hermanos Realty Co., Inc. It is represented that Pantig Hermanos Realty Co. Inc., a domestic corporation has an authorized capital stock of P5,000,000.00 divided into 50,000 common shares with a par value of P100.00 per share; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up, viz: No. of Amount Paid Amount Paid Name Shares in property in cash Total Josephine V. Pantig 28,125 P775,940.62 P11,559.38 P787,500.00 Daniel V. Pantig 3,120 86,215.63 784.37 87,000.00 Evelynda C. Pantig 5 500.00 500.00 Victor V. Pantig 3,120 86,215.62 784.38 87,000.00 Laureen Z. Pantig 5 500.00 500.00 that the following are the other stockholders of the corporation with the number of shares subscribed and paid-up viz: No. of Amount Paid Amount Paid Name Shares in property in cash Total Teresita P. Buensuceso 3,125 P86,215.63 P1,284.37 P87,500.00 Angelina P. Trivett 3,125 86,215.63 1,284.37 87,500.00 Stephanie P. Izquierdo 3,125 86,215.63 1,284.37 87,500.00 Joffre V. Pantig 3,125 86,215.62 1,284.38 87,500.00 Alphonse V. Pantig 3,125 86,215.62 1,284.38 87,500.00 that the transferors are the owners of real estate properties which they acquired by succession to the estate of the late Onofre M. Pantig, situated in Quezon City covered by TCT Nos. 338280, 338281 and 338282 of the Registry of Deeds for Quezon City and in Makati, Metro Manila covered by TCT No. 139492 of the Registry of Deeds of Rizal; that on September 1, 1986, a Deed of Assignment was executed by and between the aforenamed transferors on one hand and the corporation on the other hand, whereby the former transferred to the corporation their respective interests in the abovementioned real estate properties in part payment of their individual subscriptions to the capital stock of the corporation; and that after the exchange and as a result of the exchange, even just five of the transferors, namely: Mesdames Josephine V. Pantig, Teresita P. Buensuceso, Angelina P. Trivett and Messrs. Daniel V. Pantig and Joffre V. Pantig gained control of the corporation by owning 80% of the total voting power of all classes of stocks entitled to vote. In reply thereto, I have the honor to inform you that pursuant to Section 35, paragraph (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 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 stock received, i.e., subscribed and paid-up, whether for property or for services by the transferor 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, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by the aforenamed heirs of their respective interests in real estate properties which they acquired by succession to the estate of the late Onofre M. Pantig in part payment of their subscription to the capital stock of the Pantig Hermanos Realty Co., Inc., considering that after the exchange of properties and as a result of the said exchange the transferors will gain control of the said corporation. It should be emphasized, however, that Section 35(c)(2)(c) of the Tax Code merely defers recognition of 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 the stocks is considered. Thus, if the transferors later sell or exchange the shares of stock acquired by them in the exchange, they 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 transferors of the properties exchanged therefor; 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 transferors. (Section 35(c)(5)(a) and (b), Tax Code, as amended by Presidential Decree No. 1173). 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 35(c)(2)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned. (a) The transferors must file with their income tax returns 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 their 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 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 transferors; 2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferors 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 stock and number of shares issued to the transferors in the exchange; and c. The fair market value as of the date of exchange of the capital stock issued to the transferors. 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 245 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 properties (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 aforesaid deed. (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982). cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner