Swap of Real Properties for Shares of Stock Exempt from Capital Gains Tax

April 22, 1993 BIR RULING NO. 133-93 SWAP OF REAL PROPERTIES FOR SHARES OF STOCK EXEMPT FROM CAPITAL GAINS TAX 34 (c) (2) (C) 119-93 133-93 Juanita Martinez, Inc. No. 12 Granada corner N. Domingo Street Quezon City 1112 Attention: Ms . Juanita Martinez President This refers to your letter dated March 21, 1993 requesting in effect, a confirmation of your opinion that the transfer of your properties in favor of Pinamucan Industrial Estates, Inc. in exchange of the latter's shares of stock in accordance with Revenue Memorandum Order No. 26-92, falls under Section 34(c) (2) (c) of the Tax Code, as amended. aisadc It is represented that Pinamucan Industrial Estates, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of P90,000,000.00 divided into 900,000 shares with a par value of P100.00 per share, all of which were subscribed as follows: Name No. of Shares Total Amount Subscribed Subscribed Juanita Martinez, Inc. 799,997 P79,999,700.00 Juanita Martinez 1 100.00 Erlinda M. Reyes 1 100.00 Eugene M. Reyes 1 100.00 Antonio H. Ozaeta 50,000 5,000,000.00 Rolando M. Zosa 50,000 5,000,000.00 Total 900,000 P90,000,000.00 ====== =========== that Juanita Martinez, Inc. a domestic corporation, is the registered and absolute owner of two (2) parcels of land with an aggregate area of 400,000 square meters, situated in Pinamucan, Batangas City, and covered by Transfer Certificates of Title Nos. T-25723 and T-25724 all issued by the Registry of Deeds of Batangas City; that on April 2, 1993, Juanita Martinez, Inc. represented by its President, Ms. Juanita Martinez, executed a Deed of Assignment of all of its abovementioned properties inclusive of all the improvements thereon in favor of the Pinamucan Industrial Estates, Inc. as full payment of its above subscriptions in the total amount of P79,999,700.00; that as a result of the above transaction, Juanita Martinez, Inc. gained control of the corporation by owning 89% of the subscribed capital stock of the said corporation as follows: No. of Shares Total Amount Name Subscribed Subscribed Amount Paid Juanita Martinez, Inc. 799,997 P79,999,700.00 P79,000,700 Juanita Martinez 1 100.00 100 Erlinda M. Reyes 1 100.00 100 Eugene M. Reyes 1 100.00 100 Antonio H. Ozaeta 50,000 5,000,000.00 100,000 Rolando M. Zosa 50,000 5,000,000.00 100,000 Total 900,000 P90,000,000.00 P82,200,000 ====== =========== ========= 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 the SEC of the transferee corporation; (c) copies of the transfer certificate of title and the corresponding tax declaration; (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 transferor 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 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 that the transfer of your properties inclusive of the improvements thereof in favor of the transferee corporation, Pinamucan Industrial Estates, Inc., in exchange for its shares of stock is a tax-free transaction under Section 34(c) (2) (c) of the Tax Code, as amended, considering that as a consequence of the exchange, you 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 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 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, together 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 *