Tax Consequence of the Deed of Transfer

May 18, 1989 BIR RULING NO. 108-89 36 (c) (2) (c) 524-88 108-89 Gentlemen : This refers to your letter dated January 24, 1989 requesting in effect a ruling on the tax consequently of the Deed of Transfer executed by Atty. Bienvenido A. Tan, Jr. and Mrs. Emma R. Tan of their real properties in favor of BBB Management, Inc. in exchange for the latter's shares of stock. cdta Documentary evidence submitted shows that BBB Management, Inc. is a corporation duly organized and existing under and by virtue of the laws of the Philippines; that at the meeting of the Board of Directors and at the meeting of the stockholders held on June 21, 1982, it was resolved that the authorized capital stock of the Corporation be increased from P500,000.00 to P1,500,000.00 in order to provide additional funds for the expansion of its business; that said authorized capital stock of P1,500,000.00 divided into fifteen thousand (15,000) shares with a par value of P100.00 per share; that the amount of capital stock actually subscribed is P125,000.00 which was subscribed by the following persons with the number of shares and amount of capital stock set out after their respective names: Shares of Amount of Capital Name Stocks Stock Subscribed Bienvenido A. Tan, Jr. 616 P61,600.00 Emma R. Tan 616 61,600.00 Bienvenido A. Tan III 3 300.00 Jose Ma. Lorenzo Tan 3 300.00 Ignacio Luis Tan 3 300.00 Juan Miguel Tan 3 300.00 Anna Maria Tan 3 300.00 Ma. Mercedes Tan 3 300.00 1,250 P125,000.00 ====== ========== that the amounts set out after their respective names were paid by the following persons on their subscribed capital stock of the corporation: Name Amount Paid on Subscription Bienvenido A. Tan, Jr. P14,800.00 Emma R. Tan 14,700.00 Bienvenido A. Tan III 300.00 Jose Ma. Lorenzo Tan 300.00 Ignacio Luis Tan 300.00 Juan Miguel Tan 300.00 Anna Maria Tan 300.00 Ma. Mercedes Tan 300.00 P31,300.00 ========= that on June 30, 1982, Atty. Bienvenido A. Tan, Jr. and Mrs. Emma R. Tan made and executed a Deed of Transfer of their real properties covered by TCT No. 161614 (115192) situated in Vito Cruz, Makati, Metro Manila, No. 27-A Duplex Unit located at the Green Country Club, Baguio City and their Sierra Lakes property (Lot 10, Block 1 of the subdivision plan PCS-04-000275) situated in the Barrio of W. Talaongan, Cavinti, Laguna in favor of BBB Management, Inc. for and in consideration of P367,100.00 broken down as follows: Vito Cruz Property P134,800.00 Baguio Property 73,270.00 Sierra Lakes Property 159,030.00 P367,100.00 ========= that the transfer of P367,100.00 shall be paid by the transferee with shares of stock of the corporation consisting of 3,671 shares at a par value of P100.00; that the balance of the purchase price of the Baguio Duplex shall be assumed by the corporation; and that as a consequence of said exchange Atty. Bienvenido A. Tan, Jr. and Mrs. Emma R. Tan gained further control of BBB Management, Inc. In reply, I have the honor to inform you that pursuant to Section 35, paragraph (c)(2)(c) [now Section 34 (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 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, no gain or loss shall be recognized both to the transferors and transferee corporation on the transfer by Atty. Bienvenido A. Tan, Jr. and Mrs. Emma R. Tan of their real properties in payment for the 3,671 shares of stocks of BBB Management, Inc., considering that after the exchange of properties and as a result of said exchange, they will gain further control of said corporation. It should be emphasized, however, that Section 35(c)(2)(c) [now 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 the 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 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 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 35 (c)(5)(a) and (b), (now Section 34 (c)(5)(a) and (b) Tax Code, as amended by Presidential Decree No. 1773] The cost basis or value of the stocks received by the transferors of the properties subject to a liability, where the liability transferred and assumed by the transferee corporation does not exceed the transferor's basis or the original and/or acquisition cost of the properties transferred, shall be the difference between the liability or liabilities assumed by the transferee corporation and the acquisition or original cost of the properties transferred. On the other hand, where the total liabilities to be assumed by the transferee exceed the original or acquisition cost of the properties transferred, the excess shall be recognized as gain to the transferors and the value or cost basis of the stocks to the transferors shall be the difference between the original cost of the properties transferred subject to a liability (plus the gain recognized to the transferors) and the liability or liabilities assumed by the transferee corporation. [Section 35(c)(3) (now 34 (c)(3), supra ] 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 35(c)(2)(c) [now 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 the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfer; 2. The kind of stock received and preference 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 outstanding capital stock 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 the exchange. Moreover, pursuant to Section 245 (now Section 196) of the Tax Code, 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 to be issued or issued by BBB Management, Inc. are, in all probability, original issues which are subject to the documentary stamp tax imposed by Section 224 (now Section 175) of the Tax Code. Under then Section 251 of the Tax Code, any person who fails to affix the correct amount of documentary stamps to any taxable document, instrument, or paper, or to cancel in the manner prescribed in then Section 249 any documentary stamp affixed to any document, instrument, or paper, shall be subject to a fine of not less than twenty pesos nor more than three hundred pesos. cdtech Finally, after payment of the corresponding documentary stamp tax, the aforesaid real properties may now be registered by the Register of Deeds concerned in the name of BBB Management, Inc.. Very truly yours, (SGD.) JOSE U. ONG Commissioner