BIR Ruling No. 136-84

August 7, 1984 BIR RULING NO. 136-84 35-c-2-c-065-84-136-84 Gentlemen : This refers to your letter dated July 9, 1984 requesting a ruling on the tax consequence of the transfer by souses Benjamin S. Martin and Felicidad T. Martin of their real properties in favor of your client, B.S. Martin Enterprises, Inc. It is represented that B.S. Martin Enterprises, Inc., a domestic corporation and duly registered with the Securities and Exchange Commission, has as authorized capital stock of P5,000,000.00 divided into 50,000 common shares with a par value of P100.00 per share; that of the authorized capital stock, P1,250,000.00 has been subscribed by the stockholders representing 12,500 shares as follows: NAME NO. OF SHARES AMOUNT Atty. Benjamin S. Martin 4,750 P475,000.00 Mrs. Felicidad T. Martin 4,750 475,000.00 Mrs. Melissa M. Isidro 1,000 100,000.00 Ms. Grace T. Martin 1,000 100,000.00 Ms. Caroline T. Martin 1,000 100,000.00 12,500 P1,250,000.00 ====== =========== that spouses Benjamin S. Martin and Felicidad T. Martin owned 76% of the entire capital stock of the corporation and has a paid up of 25% of their total original subscriptions (P950,000.00) appearing in the Articles of Incorporation amounting to P237,500.00 (2,375 shares) that the spouses subscribed for additional 27,300 shares in the corporation worth P2,730,000.00 at par value of P100.00 each; that on December 20, 1983 the corporation and the said spouses executed a Deed of Conveyance whereby the spouses in consideration of and as full payment of their unpaid original and additional subscriptions (34,425 shares) in the total amount of P3,442,500.00) transferred to the corporation three (3) parcels of land together with all the improvements (building) existing thereon situated in the City of Manila covered by TCT Nos. 122880, 119352 and 115765 with a market value of P3,436,300.00, the balance of P5,970.00 to be paid in cash after which, out of the total stockholders' subscription of P3,980,000.00 covering 39,800 shares, the spouses have now subscribed and fully paid P3,680,000 which corresponds to 36,800 shares; and that the total stockholdings of the spouses in the corporation had increased from the original 76% to 92.46% of the total subscription in the corporation. In reply thereto, I have the honor to inform you that pursuant to Section 35, paragraph (c)(2)(c) of the Tax Code as amended by Republic Act No. 4522 and Presidential Decrees 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 exchanged 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 fifty-one (51%) per cent 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 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 transferor and the transferee corporation on the transfer by the spouses Benjamin S. Martin and Felicidad T. Martin of their real properties in payment of their unpaid original and additional subscriptions for shares of stock in B.S. Martin Enterprises, Inc., considering that after the exchange of properties and as a result of the said exchange, the transferors who were already in control of the B.S. Martin Enterprises, Inc. gained further control of the said corporation. It should be emphasized, however, that Section 35(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 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 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 stock 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 35(c) (5) (a) & (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 35(c) (2) (c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned. (a) The transferor 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 properties transferred, or of their interest in such properties, 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 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 stock 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 245 of the Tax Code, as amended, a conveyance or deed whereby land is assigned or transferred to the purchaser is subject to the 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 properties (Section 177 Documentary Stamp Tax Regulation). Accordingly, if a parcel of land is exchanged with stocks in a corporation as in the 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). atdc Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner