Tax Consequence of the Contemplated Transfer of Several Parcels of Land

February 8, 1989 BIR RULING NO. 014-89 34 (c) (2) (c) 524-88 014-89 S i r : This refers to your letter dated January 10, 1989 requesting a ruling on the tax consequence of the contemplated transfer of your several parcels of land together with the corresponding improvements thereon in favor of A.B. Muyot Development, Inc. cdtech It is represented that A.B. Muyot Development, Inc., is a domestic corporation duly registered with the Securities and Exchange Commission and which presently has an authorized capital stock of P500,000.00 divided into 5,000 shares with a par value of P100 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: No. of Shares Amount Paid on Name Subscribed Subscription Subscription Alberto B. Muyot 610 P61,000 P15,300 Evelina T. Muyot 610 61,000 15,300 Alberto T. Muyot 10 1,000 300 Emiliana T. Muyot 10 1,000 300 Aurelio T. Muyot 10 1,000 300 1,250 P125,000 P31,500 ===== ======= ======= that you are the absolute and exclusive owner of the following real estate properties: Market Value Per Property Location TCT No. Tax Declaration 1. Land Loyola Heights, 241724 P124,000.00 Improvements Diliman, Q.C. 135,240.00 2. Land Paraaque, S-37754 99,600.00 Improvements Metro Manila 219,350.00 3. Land Mandaluyong, 78351 P102,500.00 Improvements Metro Manila 150,610.00 4. Land Malolos, Bulacan T-229492 45,622.00 Total P876,922.00 =========== that the tax declaration of the above properties shows a total market value of P876,922; that you intend to transfer the above real estate properties to the corporation in payment of your unpaid subscription and in exchange for common shares of stock of the corporation as follows: a) P45,700 representing your unpaid subscription for 610 shares of stock, and b) P831,200 equivalent to 8,312 shares to be subscribed; that simultaneously with the exchange, the corporation will increase its authorized capital stock from P500,00 to P3,000.00; 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 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 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 share of stock of the corporation 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, A.B. Muyot Development, Inc. 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 property or of the stocks involved in the exchange, the original or historical cost of the property or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by him in exchange, he shall be subject to income tax on gain 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 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), Tax Code, as amended by Presidential Decree No. 1773] 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 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; 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 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 that 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 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 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 A.B. Muyot Development, 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. 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, A.B. Muyot Development, Inc. Very truly yours, (SGD.) JOSE U. ONG Commissioner