Tax Consequence of the Transfer of Real Properties from Lope F. Severino to L.F.S. Development Corp.

May 2, 1984 BIR RULING NO. 087-84 35-d-2-c-004-83-087-84 Gentlemen : This refers to your letter dated April 27, 1983 requesting a ruling on the tax consequence of the transfer by Mr. Lope F. Severino, Jr. of his real properties in favor of your client, L.F.S. Development Corporation. It is represented that L.F.S. Development Corporation is duly organized and existing under and by virtue of the laws of the Philippines: that the original shareholders of the corporation are as follows: Percentage of Name No. of Shares Holdings Lope F. Severino, Jr. 209,900 83.96% Olga S. Martel 9,000 3.6% Jose V. Martel 1,000 .4% Susan Sonya Severino 10,000 4.0% Hernando B. Perez 100 .04% Florinda S. Baluyot 10,000 4.0% Lope Severino III 10,000 4.0% Total 250,000 100.0% ======== ====== that Lope F. Severino, Jr. subscribed an additional 750,000 shares of stock in the said corporation and together with his original subscription of 209,900 shares of stock, his total subscriptions would amount to P959,900.00 representing 959,900 shares of stock; that Mr. Lope F. Severino, Jr. owns 95.99% of the total issued and outstanding shares of the corporation; that of the total subscription, Mr. Severino has paid P22,400.00 leaving a balance of P957,500.00; and that as payment of the balance of his subscription, Mr. Lope F. Severino transferred six (6) parcels of land, together with the improvements thereon to L.F.S. Development Corporation covered by TCT No. S-13191 issued by the Registry of Deeds of Rizal and TCT Nos. 7132, 7133, 7134, 7135, 7567, all issued by the Registry of Deeds of Silay City. 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%) percent of the total voting power of all classes of stocks entitled to vote. In determining the 15% 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. Lope F. Severino, Jr. of his real properties in payment of his unpaid subscription in L.F.S. Development Corporation considering that as a result of the said exchange, the transferor who is already in control of L.F.S. Development Corporation will gain further 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 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 transferors. (Section 35(c)(5)(a) and (B), NIRC as amended by P.D. No. 1775) 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 interests 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 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 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 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 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 stock/properties received in the exchange. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner