Tax Consequence of the Transfer of Real Property

May 17, 1990 BIR RULING NO. 085-90 34 (c) (2) (c) 055-90 085-90 Gentlemen : This refers to your letter dated March 19, 1990 on behalf of your client, RVMC Marketing Corporation, requesting a ruling on the tax consequence of the transfer of its real property in favor of Merchants Management and Holding Corporation. It is represented that RVMC Marketing Corporation (RVMC) is a domestic corporation duly registered with the Securities and Exchange Commission; that it has an authorized capital stock of P10,000,000.00 which is divided into 100,000 common shares with a par value of P100.00 per share; that the incorporators of said corporation and the respective number of shares owned by them are indicated as follows: Name No. of shares Capital Stock Amount Paid on Subscribed Subscribed Subscription Carmencita B. Dinio 22,500 P2,250,000.00 P562,500.00 Hayna F. Melgar 625 62,500.00 17,500.00 Ma. Criselda S. Oplas 625 62,500.00 15,000.00 Marietta B. Enriquez 625 62,500.00 15,000.00 Teocleta C. Belchez 625 62,500.00 15,000.00 25,000 P2,500,000.00 P625,000.00 ====== ========== ========= the RVMC is also the true, lawful and registered owner of four (4) parcels of land (including improvements therein) all situated in Barrio La Huerta, Paraaque, Metro Manila, as evidenced by Transfer Certificate of Title (TCT) Nos. 25454, 25455, 25456, and 25457, all registered at the Register of Deeds of Paraaque; that on December 28, 1989, a Deed of Exchange was executed by and between RVMC and Merchant Management and Holding Corporation (MMHC) whereby the former transferred to the latter said real properties in full payment of its subscription to the capital stock of MMHC; that after the exchange and as a result of the exchange, the transferor RVMC gained control of MMHC to the extent of owning 94% of the subscribed capital stock of said corporation. 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 stock received, i.e., 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 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 of RVMC of its property in exchange for shares of stock of MMHC considering that after the exchange and as a result of the exchange it will gain control of the transferee corporation, MMHC. It should be emphasized, however, that Section 34(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 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 exchanges the shares of stock acquired by it in the exchange, it will be subject to income tax on the gains derived from such sales or exchange, taking into consideration that the cost basis of the shares of stock shall be the same as the original acquisition cost or of the adjusted cost basis to the transferor of the properties exchanged therefore; and that the cost basis to the transferee of the properties 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] 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: cdtech (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 property transferred, or of its 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 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 the properties received from the transferor; 2. A statement of the original acquisition cost or other basis of the property 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 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. Moreover, pursuant to Section 196 of the Tax Code, as amended, a conveyance or deed whereby land assigned or transferred to the purchase is subject to documentary stamp tax based on the consideration or value received or contracted to the 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 of Assignment executed to effect said transfer. (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982) 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 stamp tax 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 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 MMHC 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 aforesaid real property may be registered by the Register of Deeds concerned in the name of Merchant Management and Holding Corporation (MMHC). 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 is not complied with, this ruling shall be considered null and void. aisadc Very truly yours, (SGD.) JOSE U. ONG Commissioner