Tax Consequence of the Transfer of a Real Property

April 28, 1989 BIR RULING NO. 087-89 24 (c) (2) (c) 020-89 087-89 Gentlemen : This refers to your letter dated April 3, 1989 requesting a ruling on the tax consequence of the transfer by Mr. Roberto B. Olanday of his real property in favor of 10, Inc. in exchange for its shares of stock. cd It is represented that 10, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission; that it has an authorized capital stock of P3,000,000 divided into 30,000 shares with a par value of P100.00 per share; that the following are the incorporators with the number of shares subscribed and paid-up, viz: No. of Capital Stock Amount Paid on Name Shares Subscribed Subscription 1. Roberto B. Olanday 2,500 P250,000.00 P62,500.00 2. Arcely Bautista 2,499 249,900.00 62,500.00 3. Ma. Corazon F. Olanday 2,499 249,900.00 62,500.00 4. Restituto T. Lopez 1 100.00 100.00 5. Virgilio R. Santos 1 100.00 100.00 7,5000 P750,000.00 P187,700.00 ====== ========== ========== that spouses Roberto B. Olanday and Ma. Corazon Olanday are the absolute and registered owners of a parcel of land situated at No. 5 Marymount St., La Vista, Quezon City covered by Transfer Certificate of Title No. 301613 of the Registry of Deeds of Quezon City; that on February 18, 1989 a Deed of Assignment was executed by Mr. Roberto B. Olanday in favor of 10, Inc. whereby the former transferred his aforesaid parcel of land worth P4,400,000.00 in favor of the latter in exchange for 44,000 common shares valued at P4,400,000.00; that 10, Inc. at the instance of Mr. Roberto B. Olanday is willing to divide equally the 44,000 common shares to Mr. Roberto B. Olanday and his spouse, Ma. Corazon F. Olanday; that simultaneously with the exchange, 10, Inc. will increase its authorized capital stock from P3,000,000.00 to P10,000,000.00; and that after the exchange and as a result of the exchange, spouses Roberto B. Olanday and Ma. Corazon F. Olanday will gain further control of the corporation by owning more than 51% of the total voting power of all classes of stocks entitled to vote. In reply, 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 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, 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 transferors and transferee corporation on the transfer by spouses Roberto B. Olanday and Ma. Corazon Olanday of their property in exchange for shares of stock of the corporation considering that after the exchange of property and as a result of the said exchange, the transferors gained further control of the said corporation. 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 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 exchanges 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 property exchanged therefore; 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 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: (a) The transferors must file with their 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 their 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 the property received from the transferors; 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 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 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 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. 245-00-000-00-109-82 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 10, Inc. are in all probability original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. aisadc After payment of the corresponding documentary stamp tax, the aforementioned real property may now be registered by the Register of Deeds concerned in the name of 10, Inc. Very truly yours, (SGD.) JOSE U. ONG Commissioner