No Gain or Loss Shall be Recognized Both to the Transferor and the Transferee Corporation on the Transfer of Real Property in Exchange for Shares of Stock

May 15, 1991 BIR RULING NO. 084-91 34 (c) (2) (c) 033-91 084-91 Gentlemen : This refers to your letter dated August 1, 1990 requesting for a ruling on the tax consequences of the transfer by Mr. Bernardo O. Armena, Jr., your client and a stockholder of Zetra Land Development, Inc., of a real property owned by him in favor of the said Zetra Land Development, Inc. It is represented, that Zetra Land Development, Inc. (hereinafter, the Corporation) is a domestic corporation duly registered with the SEC, with an authorized capital stock of four (4) million pesos divided into 40,000 shares of stock at P100 par value; that the incorporators of the Corporation, with the corresponding number of shares subscribed and paid-up are as follows: Subscribed Percent Amount No. of of share Amount paid on Shares holding Subscribed Subscription Severino Lim 4,999 49.99% P499,900 P124,900 Bernardo Armena, Jr. 4,998 49.98% 499,800 124,800 Paulino C. Petralba 1 .01 100 100 Zenaida L. Salipsip 1 .01 100 100 Yolanda M. Eleazar 1 .01 100 100 TOTAL 10,000 100% P1,000,000 P250,000 that in connection therewith, there are still 30,000 unsubscribed shares or a corresponding amount of P3,000,000; that for a consideration, Mr. Severino Lim proposes to assign his subscription rights to Mr. Bernardo Armena, Jr. whereby the latter shall assume the obligation of paying the balance of said subscription to the Corporation in the amount of P375,000.00; that Mr. Bernardo O. Armena, Jr. on the other hand, is the owner of a parcel of land covered by TCT No. 114163, located at Phase III-B-3, New Alabang Village, Muntinlupa, Metro Manila, with an area of 665 square meters and a fair market value of P3,000.00 per square meters, or a total value of P1,995,000.00; that said Mr. Armena proposes to transfer said property to the Corporation in payment of: (1) his unpaid subscription in the amount of P375,000.00; (2) the unpaid subscription of Mr. Lim also in the amount of P375,000.00; and (3) additional shares in the Corporation worth P250,000.00, for a total consideration of the land in the amount of one million pesos; that after and as a result of said exchange, Mr. Armena shall gain control of the Corporation by owning 99.98% of the total voting power of all stocks entitled to vote. As a consequence of the proposed transactions, the ownership and control of the corporation shall accordingly be: Subscribed Percent Amount No. of of share Amount paid on Shares holding subscribed Subscription Bernardo Armena, Jr. 12,497 99.976% P1,249,700 P1,249,700 Paulino C. Petralba 1 .008 100 100 Zenaida L. Salipsip 1 .008 100 100 Yolanda M. Eleazar 1 .008 100 100 TOTAL 12,500 100% P1,250,000 P1,250,000 ======== ======== ======== ======== In reply, please be informed 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 stocks in such corporation of which as 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 service by the transferor(s). In the 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. On the basis of foregoing, no gain or loss shall be recognized both to the transferor and the transferee corporation, on the transfer by Mr. Armena of his real property in exchange for shares of stock of Zetra Land Development, Inc. inasmuch as the transferor will gain control of the transferee corporation, as a result of said exchange of properties. 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 exchanged, the original or historical cost of the properties of stocks is considered. Hence, if the transferor later sells or exchanges, the shares of stock acquired by him in the exchange, he shall be subject to income tax on gains deriving from such sale or exchange, taking into consideration that the cost basis of the share shall be the same as the original acquisition cost or adjusted cost basis to the transferor of the properties exchange therefor; and that the cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferor. (Section 34 (c) (5) (a) and (b) of the Tax Code, as amended by the Presidential Decree No. 1773). cdtech Furthermore, you are 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 set forth: 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, 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 complete description of all the 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 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 the immediately after the exchange with 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 stocks/properties received in the exchange. The parties shall also cause to be annotated on the Transfer Certificates of Title and at the back of the Certificates 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 of value received or contracted to be paid for such realty. A stock in a corporation is a valuable consideration for the transfer of real property (Section 177, Documentary Stamp Tax Regulations). Accordingly, if a parcel of land is exchange 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 the Corporation 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 property may be registered by the concerned Registry of Deeds in the name of the transferee corporation, the Zetra Land Development, 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, (SGD.) JOSE U. ONG Commissioner