Tax Consequence of the Transfer by PDB of Its Real Properties in Favor of Nautica Properties, Inc. (NPI) and Nautica Realty and Development Corporation (NRDC) in Exchange for Shares of Stock of the Latter

February 25, 1991 BIR RULING NO. 033-91 34 (c) (2) (c) 136-9a 033-91 Gentlemen : This refers to your letter dated August 10, 1990 stating that on July 2, 1990, two corporations namely, Nautica Properties, Inc. (NPI) and Nautica Realty and Development Corporation (NRDC) were incorporated and registered with the Securities and Exchange Commission; that the primary purpose of both corporations is "to acquire by purchase, lease, donation or otherwise, and to own, use improve, develop, subdivide, sell, mortgage, exchange, lease, develop and hold for investment or otherwise, real estate of all kinds, improve, manage or otherwise dispose of buildings, houses apartments, and other structures of whatever kind, together with their appurtenances"; that NPI has an authorized capital stock of P20 million divided into 200,000 shares with a par value of P100.00 per share; that NRDC on the other hand has an authorized capital stock of P26 Million dividend into 260,000 shares with a par value of P100.00 per share; that both NRDC on the other hand has an authorized capital stock of P26 Million dividend into 260, per share with a par value of P100.00 per share corporations have only one class of shares of stock; that Planters Development Bank (PDB) after the authorized capital stock of both NPI and NRDC had been increased, together with five individuals, subscribed to the shares of stock of NPI and NRDC and paid its subscriptions thereon as follows: cdta Nautica Properties, Inc. Amount Percent of Amount Name Subscribed Shareholdings Paid-up Jesus P. Tambunting P84,000.00 .45 P21,000.00 Ma. Flordelis F. Aguenza 4,000.00 .02 1,000.00 Ronald A. Polido 4,000.00 .02 1,000.00 Ray P. Salazar 4,000.00 .02 1,000.00 Manuel S. Tiangco 4,000.00 .02 1,000.00 Planters Development Bank 18,390,000.00 99.46 18,165,000.00 TOTALS P18,490,000.00 100% P18,190,000.00 =========== ===== =========== Nautica Realty and Development Corporation Amount Percent Amount Name Subscribed Shareholdings Paid-up Jesus P. Tambunting P84,000.00 .33 P21,000.00 Ma. Flordelis F. Aguenza 4,000.00 .02 1,000.00 Ronald A. Polido 4,000.00 .02 1,000.00 Ray P. Salazar 4,000.00 .02 1,000.00 Manuel S. Tiangco 4,000.00 .02 1,000.00 Planters Development Bank 24,674,000.00 99.59 24,499,000.00 Total P24,744,000.00 100% P24,474,000.00 ============ ====== =========== that subscription to NPI and NRDC were paid in cash by individual shareholders while those of PDB were paid by way of assignment of real properties; and that upon assignment by PDB of its real properties to NPI and NRDC in exchange for shares of stock of the latter, it obtained more than 51% of both corporations' outstanding capital stock. In connection therewith, you now request a ruling as to the tax consequence of the transfer by PDB of its real properties in favor of NPI and NRDC in exchange for shares of stock of the latter. 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 stocks 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 corporations on the transfer by PDB of its real properties in exchange for shares of stock of NPI and NRDC considering that after the exchange of properties and as a result of the exchange, the transferor will gain control of the transferee corporations. 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 properties or of the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by it in the exchange, it 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 transferor of the properties exchanged therefor; and that the cost basis to the transferees 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] 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) (c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned: a. The transferor must file with its 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 properties transferred or of its interest in such properties, 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 corporations must file with their 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 properties 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 the 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 stock/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 to be executed to effect the aforesaid transfer (BIR Ruling No. 109-82 dated April 6, 1982). The value shall be the fair market value which shall not be less than the par value of the stocks. 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 stamps 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 NPI and NRDC 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 corporations, NPI and NRDC. cdta 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, (SGD.) JOSE U. ONG Commissioner