Tax Consequence of the Transfer of Real Properties in Favor of S.D. Flores Construction Co., Inc.

March 9, 1987 BIR RULING NO. 069-87 35 (c) (2) (c) 163-86 069-87 Gentlemen : This refers to your letter dated February 1, 1987 requesting a ruling on the tax consequence of the transfer by Mr. Serafin D. Flores of his real properties in favor of S.D. Flores Construction Co., Inc. It is represented that S.D. Flores Construction Co., Inc. is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of P400,000.00 divided into 100,000 shares with a par value of P4.00 per share; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up, viz: Name No. of Capital Amount Paid on Shares Stock Subscription Subscribed Serafin D. Flores 10,000 P40,000.00 P10,000.00 Salud R. Flores 1,500 6,000.00 1,460.00 Gerardo R. Flores 1,000 4,000.00 1,000.00 Caesar R. Flores 1,000 4,000.00 1,000.00 Ricardo C. Villarosa 2,470 9,880.00 2,420.00 Antonio D. Aliwalas 1,000 4,000.00 1,000.00 16,970 P67,880.00 P16,880.00 ====== ========= ========= that the spouses Serafin D. Flores and Salud Regna are the absolute and registered owners of four (4) parcels of land, situated in the Municipality of Antipode, Province of Rial, covered by Transfer Certificates of Title Nos. 366299, 366348, 415566 and 415567, that in addition to the abovementioned parcels of land, two (2) parcels of land also situated in the Municipality of Antipode, Province of Rial, covered by Certificate of Title Nos. N-84417 and N-21308 are registered in the name of Serafin D. Flores as absolute owner; that on February 15, 1985, a Deed of Assignment was executed by and between Serafin D. Flores and the corporation whereby Serafin D. Flores transferred to the corporation said parcels of land as payment for the issuance of shares of stocks in the capital stock of the corporation worth P288,460.00; and that after the exchange and as a result of the exchange the transferor gained control of the corporation by owning more than 50% of the authorized capital stock (P400,000.00) of the corporation. 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 Decree 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 stock received i.e. subscribed and paid up, whether for property or 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 transfer by Mr. Serafin D. Flores of his real properties as payment for the issuance of shares of stocks of S.D. Flores Construction Co., Inc. considering that after the exchange of properties and as a result of the said exchange, the transferor will gain control of the said 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 transferor later sells or exchange the shares of stock acquired by him in the exchange, he 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 transferor 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 transferor. (Section 35(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 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 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 properties transferred, or of his interest in such properties, together 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 completed 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 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 by 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 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. 245-000-00-109-82 April 6, 1982). cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner