Exchange of Real Property for Shares of Stock Tax-Free

March 17, 1993 BIR RULING NO. 111-93 EXCHANGE OF REAL PROPERTY FOR SHARES OF STOCK TAX-FREE 34 (c) (2) (C) 52-93 111-93 Mr. Ramon V. Delfin #5 Sunset Drive, Tambo Paraaque, Metro Manila This refers to your letter, dated October 9, 1992, requesting for a ruling on the tax consequence on the transfer of your real property in favor of Plus Builders, Inc. in exchange for its shares of stocks. It is represented that Plus Builders, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that it is proposing to increase its authorized capital stock from P500,000.00 to P15,000,000.00 divided into 150,000 common shares with a par value of P100.00 per share, which were subscribed and paid as follows: A. Stockholders and their holdings on record before the proposed increase in capital Name No. of Shares Amt. Subscribed Rosario D. Bondoc 1,251 P125,100.00 Ramon V. Delfin 1,248 124,800.00 Manuel V. Delfin 1,248 124,800.00 Manuel D. Martinez 256 25,600.00 Ma. Teresa Sales 248 24,800.00 Ma. Lourdes M. Ruiz 248 24,800.00 Josefina Martinez 248 24,800.00 Mariano D. Martinez, Jr. 248 24,800.00 Rosendo D. Bondoc 1 100.00 Eduardo D. Bondoc 4 400.00 Total 5,000 500,000.00 ==== ========= B. Stockholders and their holding after the proposed increase in capital Name No. of Shares Subscribed and Paid-in Rosario D. Bondoc 1,251 P125,100.00 Ramon V. Delfin 116,448 11,644,800.00 Manuel V. Delfin 1,248 124,800.00 Manuel D. Martinez 256 25,600.00 a. Teresa Sales 248 24,800.00 Ma. Lourdes M. Ruiz 248 24,800.00 Josefina Martinez 248 24,800.00 Mariano D. Martinez, Jr. 248 24,800.00 Rosendo D. Bondoc 1 100.00 Eduardo D. Bondoc 4 400.00 Total 120,200 P12,020,000.00 ====== =========== that Mr. Ramon V. Delfin is the absolute and registered owner of a parcel of land and the building erected thereon located at Makati, Metro Manila, covered by TCT No. 135098 issued by the Registry of Deeds of Manila; that on July 31, 1992, Mr. Ramon V. Delfin executed a Deed of Assignment in favor of Plus Builders, Inc. of the abovementioned property as full payment of his subscriptions to the increased capital stock of the said corporation in the total amount of P11,520,000.00; as a result of the above transaction, Mr. Ramon V. Delfin gained control of the corporation by owning at least 51% of the subscribed capital stock of the 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 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 properties 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 transferors 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 the 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, the transfer of your real property together with the improvements thereon in exchange for shares of stock of the transferee corporation, Plus Builders, Inc., considering that as a consequence of the exchange, you gained control of the transferee corporation, qualifies as a tax-free transaction under Section 34(c)(2)(c) of the Tax Code, as amended. aisadc 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 stock 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/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)(c) 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 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 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 cd i 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; 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 Condominium Certificate of Titles and the back of the Certificate of Stocks, the date the 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. 245-00-000-00-108-82, 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 by Plus Builders, Inc. are, in all probability original issues, which are subject to 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, Plus Builders, 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. cdta JOSE U. ONG Commissioner of Internal Revenue