Tax Consequence of the Transfer of Real Properties

April 4, 1988 BIR RULING NO. 126-88 34 (c) (2) (c) 402-87 126-88 M a d a m : This refers to your letter dated March 17, 1988 requesting a ruling on the tax consequence of the transfer by your clients, spouses Ignacio Jaotayag and Andrea V. Jao of their real properties in favor of Pair Management and Development Corporation. It is represented that on December 8, 1987, spouses Ignacio Jaotayag and Andrea V. Jao together with three other incorporators, organized Pair Management and Development Corporation with a capital stock of P10,000,000.00 divided into 100,000 shares with a par value of P100.00 per share; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up viz: No. of Shares Value of Name Subscribed Shares Subscribed Ignacio Jaotayag 43,745 P4,374,500.00 Andrea V. Jao 43,745 4,374,500.00 Rodolfo V. Jao 6,250 625,000.00 Perico V. Jao 6,250 625,000.00 Eulalio Pangilinan 10 1,000.00 Total 100,000 P10,000,000.00 ============ that the spouses Ignacio Jaotayag and Andrea V. Jao paid only P624,950.00 each on their respective subscriptions or a total of P1,245,900.00, thereby leaving an unpaid balance of P3,749,550.00 for each of them; that on March 10, 1988, spouses Ignacio Jaotayag and Andrea B. Jao assigned and transferred their respective rights, titles and interests in the following real properties: TCT Nos. Location Fair Market Value No. 14777 Caloocan City P199,000.00 No. 15535 No. 15192 Caloocan City 195,000.00 No. 16101 Caloocan City 573,230.00 No. 15073 Caloocan City 199,000.00 No. 14774 No. 52 Caloocan City 200,000.00 No. 19352 Manila 1,166,340.00 No. 23317 Manila 742,200.00 No. 248056 Quezon City 271,800.00 No. 93784-R San Fernando, Pampanga 3,477.00 No. 93785-R San Fernando, Pampanga 49,354.41 No. 93786-R Bacolor, Pampanga 43,740.00 No. 93787-R Bacolor, Pampanga 8,140.00 No. 10735 Pampanga 46,794.40 No. 10593 Pampanga 7,500.00 No. 10594 Pampanga 9,000.00 No. 46377 Angeles City 42,000.00 No. 15321 Pampanga 42,118.50 No. 50792 Angeles City 36,300.00 No. 50793 Angeles City 36,300.00 No. 8973 Pampanga 79,661.35 No. 8974 Pampanga 10,602.84 No. 19881-R Pampanga 52,316.40 No. 48906 Angeles City 749,536.00 No. 48908 Angeles City 69,920.00 No. 48909 Angeles City 24,772.00 No. 48910 Angeles City 5,900.00 No. 48912 Angeles City 15,200.00 No. 48913 Angeles City 180,360.00 No. 48911 Angeles City 23,750.00 No. 48907 Angeles City 74,900.00 No. 214236 Las Pias, Rizal 74,620.00 No. 214239 Las Pias, Rizal 176,400.00 No. 334021 Quezon City 609,920.00 No. 334020 Quezon City 1,569,030.00 No. 16216 Pampanga 1,552,320.00 No. 49833 Angeles City 64,400.00 No. 156125 Manila 512,315.00 No. 1187 Manila 107,190.00 No. 103625 Caloocan City 346,000.00 No. 93788-R Pampanga 104,610.00 TOTAL VALUE P10,275,018.04 ============ as full payment of their unpaid subscription to the corporation and that after the exchange and as a result of the exchange, the transferors who owned more than 51% of the total voting power of all classes of stocks entitled to vote, will have fully paid the unpaid balance of their subscription to the capital stock of the corporation. cdtech 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 processing 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 and paid-up, whether for property or for services by the transferor of 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 by your client, spouses Ignacio Jaotayag and Andrea V. Jao of their real properties in exchange for shares of stock of the transferee-corporation, considering that after the exchange of properties and as a result of said exchange, the transferors will gain further control of the transferee 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 sale or exchange the shares of stock 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 stocks 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] 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 was consummated, a complete statement of all facts pertinent to the exchange, including: 1. A description of the property transferred, or of their 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 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 the property received from the transferors; 2. A statement of the original acquisition cost or other basis of the property in the hands of the transferors and the adjusted cost basis thereof at the time of the transfer and; a. The total issued and outstanding capital stock prior to and immediately after the exchange, with a complete description of each class of stocks; 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 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. 245-00-000-00-102-82 dated April 6, 1982) Furthermore, under Section 248(d) in relation to Section 173 of the Tax Code as amended by Executive Order No. 273, in case of failure to affix the proper documentary stamp 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 twenty-five percent of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. 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 Pair Management and Development Corporation. cdta Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner