Tax Consequence of the Transfer of Real Properties

May 25, 1989 BIR RULING NO. 110-89 34 (c) (2) (c) 020-89 110-89 Gentlemen : This refers to your letter dated November 25, 1987 requesting a ruling on the tax consequence of the transfer by Mr. Angel L. Bunag of his real properties in favor of Angel L. Bunag and Associates Corporation (ALBACORP) cdta It is represented that ALBACORP is a domestic corporation duly registered with the Securities and Exchange Commission; that it has an authorized capital stock of ten million (P10,000,000) pesos divided into one million (1,000,000) common shares with a par value of P10.00 per share; that of the said authorized capital stock, the amount of P2,500,000 representing 250,000 shares has been subscribed of which the amount of P625,000 has been fully paid; that the following are the incorporators of the corporation with the number of shares subscribed and paid up, viz: No. of Amount Name Shares Subscribed Paid In Angel L. Bunag 122,500 P1,225,000 P306,250 Ma. Pilar Bunag 120,000 1,200,000 300,000 Mary Ellen Castillo 2,500 25,000 6,250 Edwin Villanueva 2,500 25,000 6,250 Augusto Villalon 2,500 25,000 6,250 250,000 P2,500,000 P625,000 ======= ========= ======= that the spouses Angel L. Bunag and Ma. Pilar G. Bunag are the owners of a parcel of land, together with the improvements thereon, situated in the Municipality of Paraaque, Metro Manila, covered by TCT No. 442425; that on May 30, 1987, a Deed of Assignment was executed by and between Angel L. Bunag and ALBACORP whereby the former transferred to the latter the aforesaid property in payment for its shares of stocks worth P500,000; and that after such exchange and as a result thereof, the Spouses Angel L. Bunag and Ma. Pilar G. Bunag gained control of ALBACORP by owning P2,424,000 or more than fifty percent (50%) of its subscribed and outstanding capital stock. 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 stocks 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 the transferee corporation on the transfer of the Spouses Angel L. Bunag and Ma. Pilar G. Bunag of their property in exchange for shares of stock of the transferee corporation, considering that after the exchange of properties and as a result of said exchange, they will gain further control of the transferee corporation, Angel L. Bunag and Associates Corporation. It should be emphasized, however, that 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 property exchanged therefor; and that the cost basis to the transferee of the property 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 transferor must file with his 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 property transferred, or of his interest in such property, 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 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 the property received from the transferor; 2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferor 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 transferor in the exchange; and c. The fair market value as of the date of exchange of the capital stock issued to the transferor. 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 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, under Section 248(d) in relation to Section 173 of the Tax Code, as renumbered by Executive Order No. 273, in case of failure to affix the proper documentary stamp tax to a document or instrument, there shall, for every violation, be imposed, in addition to the amount of documentary stamp tax required to be paid, an amount equivalent to 25% of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the Tax Code, as amended. Finally, the Certificate of Stocks to be issued by Angel L. Bunag and Associates 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. aisadc After payment of the corresponding documentary stamp tax, the aforesaid real property may now be registered by the Register of Deeds concerned in the name of Angel L. Bunag and Associates Corporation. Very truly yours, (SGD.) JOSE U. ONG Commissioner