No Gain or Loss Shall be Recognized Both to the Transferor or Transferee Corporation on the Transfer of Parcels of Land in Exchange of Shares of Stock

May 27, 1991 BIR RULING NO. 091-91 34 (c)(2) (c) 84-91 091-91 S i r : This refers to your letter dated February 11, 1991 requesting exemption from the capital gains tax on your transfer of real property in favor of Capitan Berong Estate, Inc. cdti It is represented that Capitan Berong Estate, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission; that it has an authorized capital stock of TWO MILLION PESOS (P2,000,000.00); which is divided into 20,000 shares with a par value of P100.00 per share; that the incorporators of said corporation and their respective number of shares owned by you are indicated as follows: Name No. of Shares Amount Subscribed Angel C. Tinio 12,500 P1,250,000.00 Jaime Tinio 1 100.00 Martin Tinio 1 100.00 Erlinda Mangahas 1 100.00 Patricio Mangahas 1 100.00 TOTAL 12,504 P1,250,400.00 ===== ========== that out of said authorized capital stock you subscribed 12,500 shares with a par value of P100.00 per share or a total of P1,250,400.00; that you are the owner of a parcel of land situated in Cabanatuan as evidenced by TCT No. T-26005 containing an area of 5,322 square meters with a fair market value of P1,250,000.00, which you transfer to Capitan Berong Estate, Inc. in payment of 12,500 shares by virtue of a Deed of Exchange executed by and between you and Capitan Berong Estate, Inc.; that as a result of the exchange you will now own more than fifty-one percent (51%) of the subscribed capital stock of said corporation. 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 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 stocks 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 stocks received, i.e., subscribed, whether for property or for services by the transferor or transferors. In determining the 51% stocks ownership, only those persons who transferred property for stocks in the same transaction may be counted up to a maximum of five (5). Accordingly, no gain or loss shall be recognized both to the transferor or transferee corporation on the transfer by you of the aforesaid parcels of land located in Cabanatuan City in exchange for Capitan Berong Estate, Inc. shares of stock considering that after the exchange and as a result of the exchange, you will gain control of the transferee corporation, Capitan Berong Estate, Inc. 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 of the stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired 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 properties exchanged therefor; and that the cost basis to the transferee of the properties exchange 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 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 his income tax return for the taxable year in which the exchange was consummate 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, together with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of 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 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 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 Certificate of Titles and at the back of the certificate of stocks the date the deed of exchange was executed 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 or value received or contracted to the paid for such realty. A stock in the corporation is a valuable consideration for transfer of real property (Section 17, Documentary Stamp Tax Regulations). Accordingly, if parcels of land including improvements thereon are exchanged with stocks in a corporation, as contemplated 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 the aforesaid proposed transfer (BIR Ruling No. 2450-00-000-00-109-82 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 the documentary stamp tax require 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 SEB Commercial Center, 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. After payment of the corresponding documentary stamp tax, the aforesaid real property may be registered by the Register of Deeds concerned in the name Capitan Berong Estate, 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, then this ruling shall be considered null and void. cdta Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner