Whether the Transfer of Property in Exchange for Its Shares of Stock in Accordance with Revenue Memorandum Order No. 26-92, Falls under Section 34(c)(2) of the Tax Code, as amended

January 12, 1994 BIR RULING NO. 014-94 34 (c) (2) & (6) (c) 370-93 014-94 GNT Realty Corporation Cor. P. del Rosario-Junquera Sts. Cebu City Attention: Ms . Milagros G . Yap Corporate Secretary Gentlemen : This refers to your request for a confirmation of your opinion that no gain or loss is recognized on the transfer of real property by the Spouses Melchor Go and Teodosia Lim Go in favor of GMT Realty Corporation in exchange for its shares of stock in accordance with Revenue Memorandum Order No. 26-92, and Section 34(c)(2) and (6)(c) of the Tax Code, as amended. It is represented that GMT Realty Corporation is a domestic corporation that is duly registered with the Securities and Exchange Commission with an authorized capital stock of Four Million Pesos (P4,000,000.00) divided into Forty Thousand (40,000) shares with a par value of One Hundred Pesos (P100.00) per share; that the amount of said capital stock which has been actually subscribed is Ten Thousand (10,000) shares, the aggregate par value of which is One Million Pesos (P1,000,000.00); and that the following persons have subscribed and paid as follows: cdtech Name Shares Amount Subscribed Amount Paid Melchor Go 2,500 P 255,000.00 P63,750.00 Teodosia L. Go 2,500 255,000.00 63,750.00 Gerard L. Go 700 70,000.00 17,500.00 Joy Marie L. Go 700 70,000.00 17,500.00 Milagros L. Go 700 70,000.00 17,500.00 Elizabeth L. Go 700 70,000.00 17,500.00 Annie G. Yu 700 70,000.00 17,500.00 Blessie G. Taguiam 700 70,000.00 17,500.00 Corazon G. O 700 70,000.00 17,500.00 Total 10,000 P1,000,000.00 P250,000.00 ====== =========== ========= that the Spouses Melchor Go and Teodosia Lim Go are the true and absolute owners of a parcel of land together with the building and improvements thereon situated at Cor. P. del Rosario-Junquera Streets, Kamagayan, Cebu City covered by Transfer Certificate of Title No. 71324 issued by the Register of Deeds of Cebu City; that on May 10, 1993, a Deed of Assignment was executed by and between the Spouses Melchor Go and Teodosia Lim Go and GMT Realty Corporation whereby the spouses who are stockholders of the transferee corporation have voluntarily offered to transfer their ownership, rights and interest over the aforementioned property in payment of 14,000 shares of stock worth One Million Four Hundred Thousand (P1,400,000.00) Pesos, subscribed by the spouses, to wit: No. of Amount Name Shares Subscribed Melchor Go 7,000 P700,000.00 Teodosia Lim Go 7,000 P700,000.00 Total 14,000 P1,400,000.00 ======= ========== that after the exchange, the spouses increased their control of the transferee corporation by owning 92.58% of the total paid-up capital of the corporation, to wit: No. of Amount Amount % of Name Shares Subscribed Paid ownership Melchor Go 10,200 P1,020,000.00 P 763,750.00 46.29 Teodosia L. Go 10,200 1,020,000.00 763,750.00 46.29 Annie G. Yu 2,800 280,000.00 17,500.00 01.06 Blessie G. Taguiam 2,800 280,000.00 17,500.00 01.06 Corazon G. O 2,800 280,000.00 17,500.00 01.06 Joy Marie L. Go 2,800 280,000.00 17,500.00 01.06 Milagros G. Yap 2,800 280,000.00 17,500.00 01.06 Gerard L. Go 2,800 280,000.00 17,500.00 01.06 Elizabeth L. Go 2,800 280,000.00 17,500.00 01.06 Total 40,000 P4,000,000.00 P1,650,000.00 100 ====== =========== =========== ==== and that in support of your request, you submitted to this Office, the following documents: a) Deed of Assignment; b) Articles of Incorporation duly registered with the SEC of the transferee corporation; c) Transfer Certificate of Title; d) Tax Declaration; e) Certification as to the original or historical cost of acquisition/adjusted cost basis of the property transferred; f) Certification by the corporate secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stocks; g) Certification of the fair market value or zonal value of the property involved in the exchange; h) Certification of percentage of ownership of the shares of stock of the transferors before and after the exchange transaction; and i) Other pertinent documents. In reply thereto, please be informed that pursuant to Section 34, paragraphs (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. Accordingly, your opinion that no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by the Spouses Melchor Go and Teodosia Lim Go of their property in exchange for shares of stock of the transferee corporation, GMT Realty Corporation, considering that as a consequence of the exchange, the Spouses gained control of the transferee corporation by owning 92.58% of the total voting stocks, is hereby confirmed. It should be emphasized, however, that Section 34(c)(2) and (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 transferors later sell or exchange the shares of stock acquired by them in the exchange, they 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 transferors 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 transferors. (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) and (6)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned. a. The transferors must file with their 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 their 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 transferors; 2. A statement of the original acquisition cost or other basis of the property 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 stocks and number of shares issued to the transferors in the exchanged; and c. The fair market value as of the date of the 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. The parties shall also cause to be annotated on the Transfer 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. cdti 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 GMT 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. 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, GMT Realty 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. cd Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue