Swap of Lands for Shares of Stock Tax-Free Exchange

March 16, 1993 BIR RULING NO. 110-93 SWAP OF LANDS FOR SHARES OF STOCK TAX-FREE EXCHANGE 34 (c) (2) (C) 388-92 110-93 Puruganan Chato, Chato Tarriela & Tan 8th Floor, Strata 200 Building Emerald Avenue, Ortigas Center Pasig, Metro Manila Attention: Atty . Liwayway V . Chato This refers to your letter dated December 28, 1992 requesting in behalf of your clients GILBERT Y. YAP, spouses KENNETH Y. YAP and AMELITA T. YAP, and spouses JESSE Y. YAP and BESSIE T. YAP (hereinafter referred to as assignors), and PRIMETOWN PROPERTY GROUP, INC. (Primetown for brevity) for a ruling on the tax consequence of the exchange of properties described hereunder as follows: It is represented that Primetown is a domestic corporation duly registered with the Securities and Exchange Commission with an original authorized capital stock of Twenty Million Pesos (P20,000,000.00) divided into Two Hundred Thousand (200,000) shares with a par value of One Hundred Pesos (P100.00) per share, of which Thirteen Million Seven Hundred Forty Two Thousand Five Hundred Pesos (P13,742,500.00) had been subscribed and Twelve Million Seven Hundred Forty Two Thousand Five Hundred Pesos (P12,742,500.00) have been paid up; that on June 15, 1992, at a regular meeting duly held, the stockholders unanimously approved the increase of Primetown's authorized capital stock from P20,000,000.00 to P59,090,000.00 or an increase of P39,090,000.00 which shall be entirely subscribed by the assignors; that the increased authorized capital stock of P59,090,000.00 is divided into 590,900 shares with a par value of P100.00 each; that the amount of said capital stock which has been actually subscribed is P1,500,000.00, as follows: aisadc Name No. of Amount Amount Paid Shares Subscribed Jesse Y. Yap 4,996 P499,600.00 P166,566.67 Kenneth Y. Yap 4,996 499,600.00 166,566.67 Gilbert Y. Yap 4,996 499,600.00 166,566.67 Bessie T. Yap 6 600.00 150.00 Amalia T. Yap 6 600.00 150.00 Total P500,000.01 Rounded Total 15,000 P1,500,000.00 P500,000.00 ====== =========== ========= that on February 4, 1993, an amended Deed of Exchange and Assignment was executed by and between Gilbert Y. Yap, Kenneth Y. Yap and spouses, Amalia T. Yap; Jesse Y. Yap and spouses Bessie T. Yap (assignors), and Primetown, whereby the assignors transferred to Primetown all their rights, titles and interest to their condominium units that are free and clear of all encumbrances, located at Makati, Metro Manila and covered by Condominium Certificates of Titles Nos. 19138, 19274, 19352, 19468, 19469, 19470, 19471, 19472, 19473 and 19474 valued at P11,259,000.00 more or less as full payment of their unpaid subscription in the amount of P750,000.00 and the balance of P10,509,000.00 as partial payment for subscription (at par value of P100.00 per share) in Primetown's increase in capital stock of P30,090.00, as follows: casia Name of Assignor Amount of Subscription Amount Unpaid from Increase Paid-up Subscription in Capital Gilbert Y. Yap P249,766.66 P13,030,000.00 P3,503,000.00 Kenneth Y. Yap 249,766.66 13,030,000.00 3,503,000.00 Jesse Y. Yap 249,766.66 13,030,000.00 3,503,000.00 Amalia T. Yap 350.00 -0- -0- Bessie T. Yap 350.00 -0- -0- Total P749,999.99 Rounded Total P750,000.00 P39,090,000.00 P10,509,000.00 ========= ============ =========== that as a result of the above transaction the assignors/transferors gained control of the corporation; and that in accordance with RMO 26-92, you submitted to this Office photocopies of the following documents: 1. Deed of Exchange and Assignment; 2. Articles of Incorporation duly registered with SEC of a corporate transferor and transferee corporation; 3. Copy of the corresponding Tax Declaration; 4. Certification as to the original or historical cost of acquisition/adjusted cost basis of the properties transferred; 5. Certification of the fair market value or zonal value of the property involved in the exchange; 6. Certification by the corporate secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stock; and 7. 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 of 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 Gilbert Y. Yap, Amalia T. Yap, Jesse Y. Yap and Bessie T. Yap of their properties in exchange for shares of stock of the transferee corporation, Primetown, considering that as a consequence of the exchange, the transferors 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, with a statements of the original acquisition cost/adjusted 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 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 Condominium Certificates of Title and at the back of the Certificates of Stock, the date the deed of exchange was executed, the original or historical cost or 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 thereof, land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the 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, 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. 245-00-000-00-105-82 dated April 09, 1982). The value shall be the fair market value which shall not be less than the par value of the stocks. casia Finally, the certificate of stocks to be issued by Primetown Property Group, Inc. 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, Primetown Property Group, Inc. This ruling is being issued on the basis of the foregoing facts as presented. 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