Tax Consequence of the Contemplated Transfer of Real Properties

February 8, 1989 BIR RULING NO. 013-A-89 34 (c) (2) (c) 524-88 013A-89 S i r : This refers to your letter dated December 2, 1988 requesting a ruling on the tax consequence of the contemplated transfer of your real properties in favor of Arlin Realty and Development Corporation. It is represented that Arlin Realty and Development Corporation is a domestic corporation duly registered with the Securities and Exchange Commission; that at present it has an authorized capital stock of P500,000.00 divided into 5,000 shares with a par value of P100.00 per share; that of the authorized capital stock of the corporation, P125,000.00 has been actually subscribed; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up, viz: casia No. of Shares Amount Paid Name Subscribed Subscription On Subscription Artemio P. Mison 624 P62,400 P15,600 Linda P. Mison 623 62,300 15,575 Ferdinand Noel R. Mison 1 100 25 Elenita R. Reventar 1 100 25 Menesio A. Reventar, Jr. 1 100 25 1,250 P125,000 P31,250 ====== ======== ======== that you are the absolute and exclusive owner of a parcel of land together with the buildings and other improvements thereon located in Muntinlupa, Metro Manila covered by TCT No. S-103578; that the tax declaration of the said property shows a total market value of P1,093,590; that you intend to transfer the said real property to the corporation in payment of your unpaid subscription and in exchange for common shares of stock of the corporation as follows: a) P46,800.00 representing the unpaid subscription for 624 shares of stock; and b) P1,046,800.00 equivalent to 10,468 shares to be subscribed. that simultaneously with the exchange, the corporation will increase its authorized capital stock from P500,000.00 to P1,500,000.00; and that after the exchange and as a result of the exchange, you will gain control of the corporation by owning more than 51% of the total voting power of all classes of stocks entitled to vote of the corporation. In reply, 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 PD 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 stock received, i. e., 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 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 transferor and the transferee corporation on the proposed transfer of your properties in exchange for shares of stock of the corporation considering that after the proposed exchange and as a result of the proposed exchange, you will gain further control of the transferee corporation, Arlin Realty and Development Corporation. It should be emphasized, however, that Section 34(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 the stocks involved in the exchange, the original or historical cost of the properties or the stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by him in the exchange, he 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 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]. 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 must file with his 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 property transferred, or of his interest in such property, 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 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 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 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). 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 tax 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 Arlin Realty and Development 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 Arlin Realty and Development Corporation. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner