Tax Consequence of the Transfer of Real Property

May 4, 1989 BIR RULING NO. 097-89 34 (c) (2) (c) 020-89 097-89 Gentlemen : This refers to your letter dated March 21, 1989 requesting confirmation of your opinion to the effect that the transfer of real property by the Spouses Alfredo and Eloisa Sison in exchange for shares of stock in Arsansi Realty Corporation qualifies as a tax exempt transaction under Section 34(c)(2)(c) of the Tax Code. aisadc It is represented that on February 22, 1988, the Spouses Alfredo and Eloisa Sison ("the Spouses") executed a Deed of Assignment in favor of Arsansi Realty Corporation ("the Company"); that in the deed of assignment, the spouses and the company agreed as follows: 1. that the spouses will assign to the company, the title to their two Forbes Park properties, worth P9,554,190.00; 2. that the spouses will pay to the company, a cash amount of P110.00; and 3. that in exchange for the assignment of the properties and the cash payment, the company will consider as fully paid the spouses' unpaid subscription in the Company's capital stock in the amount of P9,554,300.00. that on January 9, 1989, the Securities and Exchange Commission approved the registration of Arsansi Realty, Inc. and issued in its favor SEC Registration Certificate No. 158771; that Arsansi Realty, Inc. is engaged in the real estate business and owns several properties that are subject of development; that it owns other properties which it intends to develop and/or lease out; that the objective of the spouses in transferring the property into the corporation is to separate the operations of the company as a profit center without co-mingling any of the company's income and expenses to the existing income and expenses of the spouses; that in transferring the property, the spouses will receive in exchange shares of stock of the new corporation; and that as a result of the exchange, not more than four (4) persons will gain control of the corporation since the spouses will own almost 100% of the shares except the qualifying shares of the directors. cd i 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, your opinion to the effect that no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by the spouses Alfredo and Eloisa Sison of their properties in exchange for the shares of stock of Arsansi Realty Corporation, considering that after the exchange of properties and as a result of the said exchange, the transferors will gain control of the said corporation is hereby confirmed. 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/loss from a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the property or stock 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 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 transferred of the properties exchanged stocks 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 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, together with a statement of original acquisition cost or other basis thereof; and the adjusted cost basis at the time of the transfer; 2. The kind of stocks received and preference if any; 3. The number of shares of each class received; and acd 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 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 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 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 aforesaid deed. (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982. Furthermore, the certificates of stocks issued by Arsansi Realty 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. Finally, 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 document or instrument, there shall, for every violation to be imposed, in addition to the amount of documentary stamp tax required to be paid an amount equivalent to twenty-five percent of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. casia Very truly yours, (SGD.) JOSE U. ONG Commissioner