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

May 31, 1991 BIR RULING NO. 096-91 34 (c) (2) (c) 136-90 096-91 Gentlemen : This refers to your letter dated February 21, 1991 requesting a ruling on the tax consequence of the transfer by Aldex Realty corporation (Aldex Realty) of its real property in exchange for shares of stock of Excel Realty and Development Corporation (Excel Realty). It is represented that Aldex Realty transferred one (1) parcel of land covered by TCT No. 171682 with a total area of 1,140 sq. m. located at Makati, Metro Manila which has a fair market value of P5,675,999.00 in exchange for 49,995 shares of stock of Excel Realty and Development Corporation with a par value of P4,999,500.00; that Excel Realty is a domestic corporation whose primary purpose is to develop, invest, acquire, lease, sell, mortgage, administer or otherwise deal with commercial, residential, industrial or agricultural lands or buildings; that it has an authorized capital stock of 100,000 shares with a par value of P100.00 per share, of which 50,000 shares was subscribed upon incorporation; that Aldex Realty shares was subscribed to 49,995 shares and to fully pay said subscription, Aldex Realty executed a Deed of Assignment/Exchange of the said real property in exchange for 49,995 shares of stock of Excel Realty; that the said arrangement has been approved by the Securities and Exchange Commission which issued the corresponding Certificate of Incorporation of Excel Realty whose capital structure now is as follows: cdti Name No. of shares subscribed and fully paid Aldex Realty Corporation 49,995 Ben Tiu 1 Ruben Tiu 1 Jerry Tiu 1 Rosalinda T. Yap 1 Evelyn T. Lim 1 50,000 ===== that Aldex Realty which is also a duly registered domestic corporation will have controlling rights over the Excel Realty; that the stockholders of Aldex Realty has approved the separation of its holding functions from its real estate operations which will now be transferred to Excel Realty; that as Aldex Realty Corporation is now primarily engaged in the hotel business, the new company, Excel Realty will engage in the real estate business; that the precise idea is not to commingle the hotel functions of Aldex from its real estate operations which will result in a simplification of Aldex operation; and that after the exchange and as a result of the exchange, the transferor, Aldex Realty gained control of Excel Realty to the extent of more than 51% of the total voting power of all classes of stocks entitled to vote. 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 stocks 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 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 Aldex Realty of its real property in exchange for shares of stock of Excel Realty considering that after the exchange of properties and as a result of the exchange, the transferor gained control of the transferee corporation. cdtech 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 transferor later sells or exchanges the shares of stock acquired by it in the exchange, it shall be subject to income tax on gains derived from such sales or exchange, taking the 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 exchange 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 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 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 properties transferred, or of its interest in such properties, with a statement of the original acquisition cost or the 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 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 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, the original or historical cost of acquisition of the properties of shares of stock involved, 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 be 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 the aforesaid transfer (BIR Ruling No. 245-00-000-00-109-82 dated April 06, 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 stamps 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. aisadc Finally, the certificates of stocks to be issued by Excel Realty 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 the transferee corporation, Excel Realty. 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 are not complied with, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE U. ONG Commissioner