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

March 15, 1993 BIR RULING NO. 105-93 SWAP OF LAND FOR SHARES OF STOCKS TAX-FREE EXCHANGE 34 (c) (2) (c) 52-93 105-93 Cuneta Land Development Corporation 282 EDSA Extension Pasay City Attention: Atty . Ernesto A . Bernabe Corporate Secretary & Counsel This refers to your letter dated January 26, 1993 requesting in effect, a confirmation of your opinion that the transfer of properties by spouses Pablo P. Cuneta and Generosa F. Cuneta in favor of your company, Cuneta Land Development Corporation, 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. It is represented that Cuneta Land Development Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of P50,000,000.00 divided into 50,000,000 shares with a par value of P1.00 per share, of which 12,500,000 shares were subscribed as follows: cdta Stockholder No. of Shares Amt. Subscribed Pablo P. Cuneta 3,250,000 P3,250,000.00 Generosa F. Cuneta 3,125,000 3,125,000.00 Edgardo F. Cuneta 612,500 612,500.00 Reynaldo F. Cuneta 612,500 612,500.00 Leonida C. Veluz 612,500 612,500.00 Rosauro F. Cuneta 612,500 612,500.00 Letecia F. Cuneta 612,500 612,500.00 Jaime F. Cuneta 612,500 612,500.00 Carmencita C. Marquez 612,500 612,500.00 Pablo F. Cuneta, Jr. 612,500 612,500.00 Generoso F. Cuneta 612,500 612,500.00 Aida C. Sanchez 612,500 612,500.00 Total 12,500,000 P12,500,000.00 ======== =========== that spouses Pablo and Generosa Cuneta are the absolute and registered owners of the following properties: a. Four (4) parcels of land and improvements thereon located at Pasay City with the total area of 3,548.74 square meters, and covered by Transfer Certificates of Title Nos. 128172, 65213, 65214 & 69185 all issued by the Registry of Deeds of Pasay City; and b. Three (3) parcels of land and improvements thereon located at Antipolo, Rizal with the total area of 4,309 square meters, covered by Transfer Certificates of Title Nos. 111213, 102680 & 102681 all issued by the Registry of Deeds of the Province of Rizal. that on July 1, 1991 spouses Pablo and Generosa Cuneta executed a Deed of Assignment of the above-mentioned properties in favor of Cuneta Land Development Corporation as partial payment of their above subscriptions to the amount of P6,000,000.00 or to the equivalent shares of 6,000,000 only; that as a result of the above transaction, the spouses gained control of the corporation by owning at least 51% of the total voting stock of the said corporation; that in support of your request, you submitted to this Office photocopies of the following documents; (a) deed 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 property 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 the transfer by spouses Pablo and Generosa Cuneta of their properties and the improvements thereon in favor of your company, Cuneta Land Development Corporation, in exchange for shares of stock, considering that as a consequence of the exchange, the spouses gained 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 stocks 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). 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 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 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 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 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). 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 Cuneta Land 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. 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, Cuneta Land Development Corporation. 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. EUFRACIO D. SANTOS Deputy Commissioner of Internal Revenue