Tax Consequence of the Proposed Transfer of Real Properties

May 2, 1989 BIR RULING NO. 089-89 34 (c) (2) (c) 014-89 089-89 Gentlemen : This refers to your letter dated April 4, 1989 requesting a ruling on the proposed transfer by Mr. and Mrs. Cirilo T. Javelosa of their real properties in favor of CTJ Development Corporation in exchange for shares of stock of the latter. cdt It is represented that Mr. and Mrs. Cirilo T. Javelosa, residents of Iloilo City, currently own real estate properties located in Iloilo City, Makati and Baguio City with an aggregate acquisition cost of P3,955,000.00; that the spouses would like to incorporate said real estate assets by transferring them to a corporation in exchange for its shares of capital stock; that for this purpose, the spouses recently organized a new corporation, CTJ Development Corporation, with an authorized capital stock of six million pesos (P6,000,000.00) divided into 60,000 shares with a par value of P100.00 per share, 20,000 shares of which were subscribed by them; that the spouses presently own all of the said outstanding capital stock of CTJ Development Corporation except for the qualifying shares of the directors; and that it is proposed that the spouses shall transfer to the corporation the said real estate properties with all improvements thereon in exchange for 39,500 shares with a total par value of P3,955,000.00. 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 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., total 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 the transferee corporation on the proposed transfer by Mr. and Mrs. Cirilo T. Javelosa of their properties in exchange for shares of stock of CTJ Development Corporation considering that after the proposed exchange of properties and as a result of the proposed exchange, the transferors will gain further control of the transferee corporation. 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 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 gains derived from such sale or exchange, taking into consideration that the cost basis of the shares 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 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 proposed 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 properties transferred, or of their 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 the properties received from the transferors; 2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferors 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; casia b. The classes of stocks and number of shares issued to the transferors 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 property. (Section 177, Documentary Stamp Tax Regulation). 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 to be executed to effect the aforesaid 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 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 CTJ Development 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. Should the aforementioned proposed transaction materialize and after payment of the corresponding documentary stamp tax, the aforesaid real properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, CTJ Development Corporation. Very truly yours, (SGD.) JOSE U. ONG Commissioner