Swap of Land for Shares of Stocks - Tax-Free Exchange

March 15, 1993 BIR RULING NO. 103-93 SWAP OF LAND FOR SHARES OF STOCKS TAX-FREE EXCHANGE 34 (c) (2) (c) 52-93 103-93 Puno & Puno Law Offices 5th Floor, HongKong Bank Centre San Miguel Avenue, Pasig Metro Manila Attention: Roderico V . Puno This refers to your letter dated October 15, 1992 requesting in effect, confirmation of your opinion that the transfer of properties by your clients, spouses Ernesto D. Rufino and Elvira B. Rufino, in favor of Elers Realty and Development Company, Inc. (Elers Realty) in exchange for its shares of stock in accordance with Revenue Memorandum Order No. 26-92, falls under Section 34(c)(2)(c) of the Tax Code, as amended. cdtech It is represented that Elers Realty is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that it has an authorized capital stock of P10,000,000.00 which was duly increased and approved by the SEC to P100,000,000.00 divided into 1,000,000 shares with a par value of P100.00 per share; that the following are the stockholders and their respective holdings of the corporation before the increase in capital: Stockholder Amt. Subscribed Amt. Paid Ernesto D. Rufino P2,573,000.00 P2,573,000.00 Elvira B. Rufino 2,573,000.00 2,573,000.00 Consuelo R. Lopez 963,500.00 963,500.00 Teresita R. Litton 963,500.00 963,500.00 Ernesto Rufino, Jr. 963,500.00 963,500.00 Elvira R. Ledesma 713,600.00 713,600.00 Oscar M. Lopez 250,000.00 250,000.00 John J. Litton 250,000.00 250,000.00 Josefina P. Rufino 250,000.00 250,000.00 Ernesto C.R. Ledesma 100,000.00 100,000.00 Robert R. Ledesma 100,000.00 100,000.00 Emmanuel Ledesma, Jr. 99,900.00 99,900.00 Ma. Regina R. Ledesma 100,000.00 100,000.00 Elizabeth M. Ledesma 100,000.00 100,000.00 Total P10,000,000.00 P10,000,000.00 =========== =========== that spouses Ernesto and Elvira Rufino are the absolute and registered owners of the following properties: a. Three (3) commercial areas consisting of a total area of 67.10 square meters, located at Makati Cinema Square & Shopping Center Building, Makati, Metro Manila, covered by Condominium Certificates of Title Nos. 7840, 7841 & 4438 issued by the Registry of Deeds of Makati; b. An apartment unit, 210 square meters, located at Makati Tuscany Condominium, Ayala Avenue, Makati, Metro Manila, and covered by Condominium Certificate of Title No. S-1746 issued by the Registry of Deeds of Makati; and c. A parcel of land, 1,000 square meters, located at Barrio Bagong Silay, Calatagan, Batangas, and covered by Transfer Certificate of Title No. T-10737 issued by the Registry of Deeds of Batangas; that on April 7, 1992, spouses Ernesto and Elvira Rufino executed Deeds of Assignment of the above-mentioned properties in favor of Elers Realty in exchange for its additional shares of stock to the increased capital stock in the total amount of P8,296,500.00 (P4,148,250.00 for each spouse); that as a result of the above transaction, the spouses gained further control of the corporation, by owning 73.47% of the subscribed capital stock of the corporation as follows: Stockholder Amt. Subscribed Amt. Paid Ernesto D. Rufino P6,721,250.00 P6,721,250.00 Elvira B. Rufino 6,721,250.00 6,721,250.00 Consuelo R. Lopez 963,500.00 963,500.00 Teresita R. Litton 963,500.00 963,500.00 Ernesto Rufino, Jr. 963,500.00 963,500.00 Elvira R. Ledesma 713,600.00 713,600.00 Oscar M. Lopez 250,000.00 250,000.00 John J. Litton 250,000.00 250,000.00 Josefina P. Rufino 250,000.00 250,000.00 Ernesto C.R. Ledesma 100,000.00 100,000.00 Robert R. Ledesma 100,000.00 100,000.00 Emmanuel Ledesma, Jr. 99,900.00 99,000.00 Ma. Regina R. Ledesma 100,000.00 100,000.00 Elizabeth M. Ledesma 100,000.00 100,000.00 Total P18,296,500.00 P18,296,500.00 =========== =========== that spouses Ernesto and Elvira Rufino are the absolute and registered owners of the following additional properties: a. A parcel of land, 1,195 square meters, located at Bo. Diezmo, Cabuyao, Laguna, and covered by Transfer Certificate of Title No. T-94538 issued by the Registry of Deeds of Laguna; and b. Five (5) parcels of land with a total area of 5,372 square meters, located at Bo. San Jose, Tagaytay, Cavite City, and covered by Transfer Certificates of Title Nos. T-13189, T-13190, T-13191, T-21581 & T-21582 all issued by the Registry of Deeds of Tagaytay City. cd that on April 14, 1992, spouses Ernesto and Elvira Rufino executed another Deeds of Assignment of the above-mentioned properties in favor of Elers Realty in exchange for its additional shares of stock to the increased capital stock in the total amount P15,436,000.00 (P7,718,000.00 for each spouse); that as a result of the above transaction, the spouses gained further control of the corporation, by owning 85.68% of the subscribed capital stock of the corporation as follows: Stockholder Amt. Subscribed Amt. Paid Ernesto D. Rufino P14,439,250.00 P14,439,250.00 Elvira B. Rufino 14,439,250.00 14,439,250.00 Consuelo R. Lopez 963,500.00 963,500.00 Teresita R. Litton 963,500.00 963,500.00 Ernesto Rufino, Jr. 963,500.00 963,500.00 Elvira R. Ledesma 713,600.00 713,600.00 Oscar M. Lopez 250,000.00 250,000.00 John J. Litton 250,000.00 250,000.00 Josefina P. Rufino 250,000.00 250,000.00 Ernesto C.R. Ledesma 100,000.00 100,000.00 Robert R. Ledesma 100,000.00 100,000.00 Emmanuel Ledesma, Jr. 99,900.00 99,000.00 Ma. Regina R. Ledesma 100,000.00 100,000.00 Elizabeth M. Ledesma 100,000.00 100,000.00 Total P33,732,500.00 P33,732,500.00 =========== =========== that spouses Ernesto and Elvira Rufino are the absolute and registered owners of another parcel of land with an area of 2,111 square meters, located at Valley Golf Hills, Cainta, Rizal, and covered by Transfer Certificate of Title No. 153832 issued by the Registry of Deeds of Rizal; that on April 21, 1992, spouses Ernesto and Elvira Rufino executed another Deed of Assignment of the above-mentioned property in favor of Elers Realty in exchange for its additional shares of stock to the increased capital stock in the total amount of P3,166,500.00 (P1,583,250.00 for each spouse); that as a result of the above transaction, the spouses gained further control of the corporation, by owning 86.91% of the subscribed capital stock of the corporation as follows: Stockholder Amt. Subscribed Amt. Paid Ernesto D. Rufino P16,022,500.00 P16,022,500.00 Elvira B. Rufino 16,022,500.00 16,022,500.00 Consuelo R. Lopez 963,500.00 963,500.00 Teresita R. Litton 963,500.00 963,500.00 Ernesto Rufino, Jr. 963,500.00 963,500.00 Elvira R. Ledesma 713,600.00 713,600.00 Oscar M. Lopez 250,000.00 250,000.00 John J. Litton 250,000.00 250,000.00 Josefina P. Rufino 250,000.00 250,000.00 Ernesto C.R. Ledesma 100,000.00 100,000.00 Robert R. Ledesma 100,000.00 100,000.00 Emmanuel Ledesma, Jr. 99,900.00 99,000.00 Ma. Regina R. Ledesma 100,000.00 100,000.00 Elizabeth M. Ledesma 100,000.00 100,000.00 Total P36,899,000.00 P36,899,000.00 =========== =========== that spouses Ernesto and Elvira Rufino are the absolute and registered owners of another parcel of land with an area of 822 square meters, located at San Lorenzo Village, Makati, and covered by Transfer Certificate of Title No. S-13269 issued by the Registry of Deeds of Rizal; that on April 24, 1992, spouses Ernesto and Elvira Rufino executed another Deed of Assignment of the above-mentioned property in favor of Elers Realty in exchange for its additional shares of stock to the increased capital stock in the total amount of P12,222,000.00 (P6,111,000.00 for each spouse); that as a result of the above transaction, the spouses gained further control of the corporation, by owning 90.12% of the subscribed capital stock of the corporation as follows: Stockholder Amt. Subscribed Amt. Paid Ernesto D. Rufino P22,133,500.00 P22,133,500.00 Elvira B. Rufino 22,133,500.00 22,133,500.00 Consuelo R. Lopez 963,500.00 963,500.00 Teresita R. Litton 963,500.00 963,500.00 Ernesto Rufino, Jr. 963,500.00 963,500.00 Elvira R. Ledesma 713,600.00 713,600.00 Oscar M. Lopez 250,000.00 250,000.00 John J. Litton 250,000.00 250,000.00 Josefina P. Rufino 250,000.00 250,000.00 Ernesto C.R. Ledesma 100,000.00 100,000.00 Robert R. Ledesma 100,000.00 100,000.00 Emmanuel Ledesma, Jr. 99,900.00 99,000.00 Ma. Regina R. Ledesma 100,000.00 100,000.00 Elizabeth M. Ledesma 100,000.00 100,000.00 Total P49,121,000.00 P49,121,000.00 =========== =========== that in support of your request, you submitted to this Office photocopies of the following documents: (a) deeds of assignment; (b) articles of incorporation duly registered with the SEC of the transferee corporation; (c) copies of the transfer certificates of title and the corresponding tax declarations; (d) certification as to the original or historical cost of acquisition/adjusted cost basis of the properties transferred; (e) certification by the corporate secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stock; (f) certification of percentage of ownership of the shares of stock by the transferor as a result of the transaction; and (g) other pertinent documents. 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 stocks in the same transaction may be counted up to a maximum of five. Accordingly, your opinion that no gain or loss shall be recognized both to the transferors and the transferee corporation on each transfer by the spouses Ernesto and Elvira Rufino of their properties together with the improvements thereon in exchange for shares of stock of the transferee corporation, Elers Realty, considering that as a consequence of each of said exchanges, the transferors gained further control of the transferee 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 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 stocks shall be the same as it would be in the hands of the transferors. (Section 34(c)(5)(a) and (b) of the Tax Code, as amended by Presidential Decree No. 1773). casia 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 transaction 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 the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer; 2. The kind of stocks 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 transferors; 2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferors and 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 transferors in the exchange; and c. The fair market value as of the date of the 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. 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 or 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 basis of the documentary stamp tax on the Deed of Assignment executed to effect the aforesaid transfer (BIR Ruling No. 245-00-000-00-82 dated April 06, 1982). The value shall be the fair market value which shall not be less than the par value of the stocks. Finally, the certificate of stocks to be issued to Elers 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 real properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, Elers 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. aisadc JOSE U. ONG Commissioner of Internal Revenue