Tax Consequences of Transfer of Real Properties in Exchange for Shares of Stock

May 31, 1994 BIR RULING NO. 109-94 34 (c) (2) & (6) (c) 000-00 109-94 The Law Offices of King Capuchino Tan & Associates 2nd Floor, Belman II Building Quezon Avenue corner Cordillera St. Quezon City Attention: Atty . Lincoln L . Tan, Jr . Gentlemen : This refers to your letter dated October 18, 1993 stating that your client, RAQ Management & Development Corporation, is a domestic corporation duly registered with the Securities and Exchange Commission under SEC Reg. No. A8093-003062; that it was organized primarily to engage in the management and development of real properties; that it has an authorized capital stock of P20,000,000.00 divided into 200,000 shares with a par value of P100.00 per share: that the incorporators of the corporation together with their respective subscriptions and the amount paid thereon are as follows: cdt NAME AMOUNT PERCENTAGE AMOUNT SUBSCRIBED PAID Raquel A. Quilantang P600,000.00 12% P150,000.00 Jose A. Quilantang 550,000.00 11% 137,500.00 Ma. Magdalena A. Quilantang 550,000.00 11% 137,500.00 Ma. Cristina Q. Eugenio 550,000.00 11% 137,500.00 Antonio A. Quilantang 550,000.00 11% 137,500.00 Benedict A. Quilantang 550,000.00 11% 137,500.00 Ma. Luisa Q. Eusebio 550,000.00 11% 137,500.00 Jesus A. Quilantang 550,000.00 11% 137,500.00 Oscar A. Quilantang 550,000.00 11% 137,500.00 Total P5,000,000.00 100% P1,250,000.00 =========== ====== =========== that in consonance with the primary purpose for which the corporation was organized, the above-named stockholders had executed Deeds of Transfer in favor of the corporation over several real properties owned by them, which properties are as follows: NAME OF OWNERS(S) TCT NO. VALUE Raquel A. Quilantang 63774 P3,779,900.00 Raquel A. Quilantang 46419 6,349,140.00 Raquel A. Quilantang 87314 1,299,760.00 Raquel A. Quilantang 150807 407,500.00 Raquel A. Quilantang (10/18 share); Oscar, Jose, Antonio, Jesus, Benedict and Ma. Magdalena (all surnamed Quilantang), Ma. Luisa Q. Eusebio and Ma. Cristina Q. Eugenio (1/18 share each) 241277 500,000.00 -do- 241279 500,000.00 -do- 241280 500,000.00 -do- 241278 720,000.00 -do- 241281 739,200.00 -do- 228017 2,812,725.00 -do- 607951 533,750.00 T o t a l P18,141,900.00 =========== that in consideration of the transfer of the above stated real properties, the corporation shall issue its shares of stock of equivalent value of the respective stockholders; that as a consequence of the transfer of the real properties in exchange for shares of stock, the following shall be the respective shares of the stockholders of the corporation: NAME NO. OF SHARES AMOUNT PERCENTAGE Raquel A. Quilantang 154,543 P15,454,300.00 77.84% Jose A. Quilantang 5,500 550,000.00 2.77% Ma. Magdalena A. Quilantang 5,500 550,000.00 2.77% Ma. Cristina Q. Eugenio 5,500 550,000.00 2.77% Antonio A. Quilantang 5,500 550,000.00 2.77% Benedict A. Quilantang 5,500 550,000.00 2.77% Ma. Luisa Q. Eusebio 5,500 550,000.00 2.77% Jesus A. Quilantang 5,500 550,000.00 2.77% Oscar A. Quilantang 5,500 550,000.00 2.77% Total 193,543 P19,854,300.00 100.00% ====== =========== ======= In support of the foregoing representations, you submitted to this Office photocopies of the following documents: 1. Deeds of Transfer executed by the afore-named stockholders; 2. Articles of Incorporation of RAQ Management & Development Corporation; 3. Transfer of Certificates of Title of the properties transferred; 4. Tax Declarations of the properties transferred; 5. Certification as to the original or historical cost of acquisition of the properties transferred; 6. Certification of Fair Market Value; and 7. Certification of its authorized capitalization and of percentage of ownership of stock of the transferors after the transfer of properties. In connection therewith, you now request confirmation of your opinion that no gain or loss shall be recognized on the abovementioned transfer of real properties to RAQ Management and Development Corporation in exchange for its shares of stock considering that after the exchange of properties and as a result of the said exchange, Raquel A. Quilantang, Jose A. Quilantang, Ma. Magdalena A. Quilantang, Ma. Cristina Q. Eugenio and Antonio A. Quilantang will gain control of the corporation, as follows: NAME NO. OF SHARES AMOUNT PERCENT Raquel A. Quilantang 154,543 P15,454,300.00 77.8% Jose A. Quilantang 5,500 550,000.00 2.77% Ma. Magdalena A. Quilantang 5,500 550,000.00 2.77% Ma. Cristina Q. Eugenio 5,500 550,000.00 2.77% Antonio A. Quilantang 5,500 550,000.00 2.77% In reply, please be informed that pursuant to Section 34 paragraphs (c)(2) and (6)(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 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 to the effect that no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by Raquel A. Quilantang, Jose A. Quilantang, Ma. Magdalena A. Quilantang, Ma. Cristina Q. Eusebio and Antonio A. Quilantang of their real properties together with all the improvements existing thereon in exchange for the shares of stock of equivalent value of RAQ Management and Development Corporation is hereby confirmed, considering that after the exchange of properties and as a result of the said exchange, not more than five (5) of the transferors, namely Raquel A. Quilantang, Jose A. Quilantang, Ma. Magdalena A. Quilantang, Ma. Cristina Q. Eugenio and Antonio A. Quilantang will gain control of the transferee corporation, RAQ Management & Development Corporation, by owning more than 51% of the total voting power of all classes of stocks entitled to vote. It should be emphasized, however, that Section 34(c)(2) and (6)(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 stock acquired by them in the exchange, they shall be subject to income tax on the gain 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 34(c)(5) (a) and (b), Tax Code, as amended by Presidential Decree No. 1773] cdtech However, insofar as the remaining four (4) other stockholders who also transferred their respective shares in the same properties in favor of the corporation in exchange for its shares, namely: NAME NO. OF SHARES AMOUNT PERCENT BENEDICT A. QUILANTANG 5,500 P550,000.00 2.77 MA. LUISA Q. EUSEBIO 5,500 550,000.00 2.77 JESUS A. QUILANTANG 5,500 P550,000.00 2.77 OSCAR A. QUILANTANG 5,500 P550,000.00 2.77 the transfer thereof shall be subject to capital gains tax computed as follows: Valuation/price of properties transferred (TCT Nos. 241277, 241279, 241280, 241278, 241281, 228017 and 607951 P6,305,600.00 Share of each of the co-owner above-mentioned is 1/18 354,700.00 Gross selling price/co-owner 354,700.00 Rate of Tax x 5% Capital gains tax due P17,735.00 from each of the four =========== (4) stockholders 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) and (6)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned: (a) The transferors (not more than 5) of the properties must file with their income tax returns 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 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. The 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 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 exchange of the capital stock issued to the transferors. In addition to the foregoing requirements, permanent records 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 title and at the back of the Certificate of Stocks, the date the deed of exchange (transfer) 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 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 Deeds of Transfer executed to effect the aforesaid transfer. (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982). The value shall be the fair market value which shall not be less than the par value of the stocks. aisadc Furthermore, the certificates of stock to be issued by RAQ Management & 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 with the Registers of Deeds concerned in the name of the transferee corporation, RAQ Management & Development Corporation. Finally, this ruling shall also serves as an authority for the Corporate Secretary of RAQ Management & Development Corporation to effect the registration of the shares of stock in the stock and transfer book of the corporation in favor of the aforenamed stockholder-transferors. This ruling hereby modifies BIR Ruling No. 071-92 dated February 27, 1992 and all other similar rulings insofar as they held that no gain or loss shall be recognized on the transfer of property to the transferee corporation in exchange for the latter's shares of stock by the transferors in excess of, or other than the five (5) controlling transferor-stockholders. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue