Whether the Transfer of Property in Exchange for Its Shares of Stock in Accordance with RMO 26-92 Falls under Section 34(c)(2)

January 13, 1994 BIR RULING NO. 021-94 34 (c) (2) & (6) (c) 441-93 021-94 Arthur D. Lim Law Office 4th Floor, Cattleya Building 235 Salcedo St., Legaspi Village 1229 Makati, Metro Manila Attention: Atty . Ma . Hildelita N . Pagkatipunan Gentlemen : This refers to your letter dated February 3, 1993 requesting in effect for a confirmation of your opinion that no gain or loss is recognized on the transfer of properties by the Spouses Wan Lian Tan and Genevieve L. Tan to Southville International Eduvision, Inc. (Southville for brevity) in exchange for the latter's 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 Southville International Eduvision, Inc. is a domestic corporation that is duly registered with the Securities and Exchange Commission with an authorized capital stock of Ten Million Pesos (P10,000,000.00) divided into One Hundred Thousand (100,000) shares with a par value of One Hundred Pesos (P100.00) per share, of which the sum of P2.5 Million has been subscribed and the total amount of P625,000.00 paid in by the following stockholders: cdta No. of Amount Name Stocks Subscribed Amount Paid Genevieve Ledesma Tan 12,000 P1,200,000.00 P300,000.00 Wan Lian Tan 12,250 1,225,000.00 306,250.00 Linda B. Cambia 250 25,000.00 6,250.00 Luz Bella Bartolome 250 25,000.00 6,250.00 Avelina Mandin 250 25,000.00 6,250.00 Total 25,000 P2,500,000.00 P625,000.00 ====== =========== ========= that the Spouses Wan Lian Tan and Genevieve L. Tan are the absolute owners of four (4) parcels of land located at BF Homes Subdivision, Paraaque, Metro Manila and covered by Transfer Certificate of Title Nos. 42611, 51791, 61408 and 39292 issued by the Registry of Deeds of Paraaque, Metro Manila; that certain improvements valued at P215,930.00 were introduced by the said spouses on the parcel of land covered by Transfer Certificate of Title No. 51791; that in exchange for a total of 17,639 fully paid shares in Southville, issued at the par value of P100.00 per share, or the total amount of P1,763,900.00 equivalent to the zonal value or fair market value of the above-mentioned properties, the spouses have assigned, transferred, and conveyed in favor of Southville the real properties covered by TCT Nos. 42611, 51791, 61408 and 39292 including the improvements introduced on the lot covered by TCT No. 51791; that Mr. Wan Lian Tan is likewise the owner of two (2) parcels of land located at BF Homes, Paraaque and covered by Transfer Certificate of Title Nos. 389048 (48374-A) and 389049 (48373-A), likewise issued by the Registry of Deeds of Paraaque; that under Entry No. 27752 of the above certificates of title, Yu Chi Hua Tan, Mr. Tan's deceased first wife, acknowledged that Mr. Tan's exclusive capital was used to purchase the subject properties, hence, said properties were not conjugal partnership property; that in exchange for a total of 11,115 fully paid shares in Southville, issued at the par value of P100.00 per share, or the total amount of 1,111,500.00 equivalent to the zonal value or market value of the above-mentioned real properties, Mr. Tan has assigned, transferred and conveyed in favor of Southville the real properties covered by TCT Nos. 389048 (48374-A) and 389049 (48373-A); that on January 29, 1993, Deeds of Assignment were executed by and between the Spouses and Southville whereby the spouses transferred to Southville the above-mentioned properties in exchange for their unpaid subscription to the capital stock of the corporation; that in support of your request, you submitted to this Office photocopies of the following documents: a) Deeds of Assignment; b) Articles of Incorporation duly registered with the SEC of the transferee corporation; c) Copy of the corresponding Transfer Certificates of Title; d) Copy of the corresponding Tax Declaration; e) Certification as to the original or historical cost of acquisition/adjusted cost basis of the property transferred; f) Certification of the fair market value or zonal value of the property involved in the exchange; g) Certification by the corporate secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stock; h) Certification of percentage of ownership of the shares of stock by the transferors before and after the exchange transaction; and e) 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 to the effect that no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by Spouses Wan Lian Tan and Genevieve L. Tan of their properties in exchange for shares of stock of the transferee corporation, Southville, considering that after the said exchange transactions and as a result thereof, the Spouses gained further control of the transferee corporation by owning 98.6% of its 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 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 34(c)(5)(a) and (b) of the Tax Code, as amended by Presidential Decree No. 1773). cdti 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 properties transferred, or of their interest in such properties, 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 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 stocks and number of shares issued to the transferors in the exchange; 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 Titles 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. 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 certificates of stocks to be issued by Southville International Eduvision, 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. After payment of the corresponding documentary stamp tax, the real properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, Southville International Eduvision, Inc. 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. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue