Tax Consequence of the Transfer of Real Properties in Exchange for Shares of Stock of Guagua Sports and Amusement Corp.

March 26, 1984 BIR RULING NO. 065-84 35 (c) (2) (c)-004-83-065-84 S i r : This refers to your letter dated March 3, 1984 requesting a ruling on the tax consequence of the transfer of certain real properties by spouses BLC and LCC and spouses ALC and EGC in exchange for 10,000 shares of the capital stock of Guagua Sports and Amusement Corporation. It is represented that Guagua Sports and Amusement Corporation is a domestic corporation 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) common stocks with a par value of One Hundred Pesos (P100.00) per share; that out of the said authorized capital stock, Two Million Five Hundred Thousand Pesos (P2,500,000.00) worth of shares of stock had been subscribed; that the following are the incorporators of the corporation with the number of shares subscribed and paid up, viz: NO. OF AMOUNT AMOUNT NAME SHARES SUBSCRIBED PAID-UP 1. BLC 5,000 P500,000.00 P125,000.00 2. ALC 5,000 500,000.00 125,000.00 3. LCC 5,000 500,000.00 125,000.00 4. EGC 5,000 500,000.00 125,000.00 5. PGC 5,000 500,000.00 125,000.00 TOTAL 25,000 P2,500,000.00 P625,000.00 ====== =========== ========== that in December 1983, Spouses B and LC and Spouses A and EC transferred and conveyed by a Deed of Exchange their two parcels of land situated at Guagua, Pampanga under TCT Nos. 164267-R, and 176153-R in exchange for 10,000 shares of the capital stock of the corporation worth One Million Pesos (P1,000,000.00); and that after the exchange, and as a result of such exchange, the transferors will maintain or gain further control of the transferee corporation by owning 90% of the total capital stock thereof. In reply thereto, I have the honor to inform you that pursuant to Section 35, paragraph (c)(2)(c) of the Tax Code as amended by Republic Act No. 4522 and Presidential Decrees 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 fifty-one (51%) per cent 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 and paid-up, 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 transferors and the transferee corporation on the transfer by the spouses B and LC and spouses A and EC of their real properties in exchange for 10,000 shares of the transferee CORPORATION, Guagua Sports and Amusement Corporation, considering that after the exchange of properties and as a result of the said exchange, the transferors gained further control of the transferee corporation by owning 85.71% (not 90%) of the total voting power of all classes of stocks entitled to vote of the corporation. It should be emphasized, however, that Section 35(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 of the stocks involved in the exchange, the original or historical cost of the properties or the 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 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 transferors of the properties exchanged therefor; and that the cost basis of the transferees of the properties exchanged for stocks shall be the same as it would be in the hands of the transferors. (Section 35(c)(5)(a) & (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 35(c)(2)(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 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, together with a statement of the original acquisition cost or their basis thereof and the adjusted cost basis at the time of the transfer; (2) The kind of stock received and preference 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 stock and number of shares issued to the transferors in the exchange; and (c) The fair market value as of the date of 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. Moreover, pursuant to Section 245 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 Regulation). 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). Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner