Tax Consequence of the Transfer of the Real Properties

May 19, 1981 BIR RULING NO. 082-81 035-c-2-c 10-81 082-81 JFAB Construction and Industrial Corporation Room 504 Burke Building, David Street, Escolta, Manila Attention: Mr . Jose Ferdinand A . Bautista President Gentlemen : This refers to your letter dated January 6, 1981 requesting a ruling on the tax consequence of the transfer of the real properties of Mr. Marciano D. Bautista & Mrs. Amelia A. Bautista in payment of their respective subscribed shares of stock of JFAB Construction and Industrial Corporation. It appears that JFAB was incorporated on December 29, 1978; that according to its articles of incorporation, JFAB has an authorized capital stock of P5,000,000.00 divided into 50,000 shares with a par value of P100.00; and that the following are the incorporators of JFAB, with the number of shares subscribed and paid up, viz: Name No. of Shares Amount Amount Subscribed Subscribed Paid Amelia A. Bautista 2,500 P250,000.00 P62,500.00 Ismael D. Bautista 600 60,000.00 15,000.00 Jose Ferdinand A. Bautista 2,000 200,000.00 50,000.00 Marciano D. Bautista 3,860 386,000.00 96,500.00 Carmelita S. Cayco 20 2,000.00 2,000.00 Ceferino F. Cayco 20 2,000.00 2,000.00 Trinidad B. Valero 1,000 100,000.00 25,000.00 10,000 P1,000,000.00 P253,000.00 ===== ========= ======== Thereafter, in the Deeds of Assignments all dated December 10, 1980, Marciano D. Bautista and Amelia Bautista assigned to JFAB certain parcels of land in payment of shares of the unsubscribed capital stock of JFAB as follows: casia Name T.C.T. No. of No. of Shares Amount Land Assigned Location Assigned Paid Marciano B. Bautista 383430 Binangonan 400 P40,000.00 179399 Teresa Amelia A. Bautista M-5719 Binangonan 200 20,000.00 Marciano B. Bautista 155083 Antipolo 500 50,000.00 Amelia A. Bautista 56322 Quezon City 400 40,000.00 Marciano B. Bautista 171740 Quezon City 1,000 100,000.00 2,500 P250,000.00 ==== ======== In this transactions, therefore, Marciano and Amelia acquired 1,900 shares and 600 shares respectively, in JFAB. Finally, in a Deed of Assignment dated February 5, 1981, it appears that the stockholders Marciano Bautista, Trinidad Bautista-Valero and Ismael D. Bautista transferred to JFAB certain parcels of land in Tarlac, Tarlac, of which they are the co-owners, as partial payment of additional shares subscribed by them as follows: Name No. of Shares Amount Amount Subscribed Subscribed Paid Marciano D. Bautista 11,513 P1,151,300.00 P614,300.00 Trinidad Bautista Valero 8,653 865,300.00 614,300.00 Ismael D. Bautista 8,254 825,400.00 614,400.00 28,420 P2,842,000.00 P1,843,000.00 ===== ========= ========= In other words, the parcels of land were assigned by the said stockholders in payment of the amount of P1,843,000.00 for 18,430 shares. 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, 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 the corporation possessing at least fifty-one (51%) percent of the total voting power of all classes of stocks entitled to vote. cd The transfer of the real properties of Mr. Marciano D. Bautista and Mrs. Amelia A. Bautista on December 10, 1980 in payment of the shares of the unsubscribed capital stock of JFAB resulted in the acquisition of additional stocks out of the unsubscribed capital stock. Since the said spouses were already in control of the corporation, their acquisition of additional stocks resulted in their gaining further control of the said corporation. The said spouses after the said exchange owned 70% of the total voting power of all classes of stocks entitled to vote. Such being the case, no gain or loss shall be recognized on the aforementioned transfer. In the Deed of Assignment dated February 5, 1981, stockholders Marciano Bautista, Trinidad Bautista Valero and Ismael D. Bautista gained further control of the corporation by owning 87% of the total voting power of all classes of stocks entitled to vote. Such being the case, no gain or loss shall likewise be recognized on this transfer. 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 to the transferee of the properties exchanged for stock shall be the same as it would be in the hands of the transferors. (Section 35(c) (4) of the Tax Code). In this connection, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gain 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 returns 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 property transferred, or of their respective interest in such property, 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 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 property received from the transferors; (2) A statement of the original acquisition cost or other basis thereof in the hands of the transferors and the adjusted cost basis at the time of the transfer; cd i (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 casia (c) The fair market value of the capital stock as of the date of exchange which was 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. All said requirements should be complied with; otherwise, the exchange shall not be considered an exempt transaction within the purview of Section 35(c) of the Tax Code. Very truly yours, RUBEN B. ANCHETA Acting Commissioner