Tax Consequence of a Property Transferred to a Corporation

July 12, 1990 BIR RULING NO. 136-90 34 (2) (c) (c) 030 136-90 Gentlemen : This refers to your letter dated July 2, 1990 stating that your request for ruling dated March 28, 1990 be disregarded insofar as the capital contribution is concerned and instead, you now request a ruling to the effect that no gain or loss shall be recognized on the proposed exchange by San Miguel Corporation (SMC) and A. Soriano Corporation (ANSCOR) of their respective real properties in exchange for shares of stock of KSA Realty Corporation (KSA) based on the following facts: cdta "1. KSA Realty Corporation (KSA) is in the process of incorporation. It will have an authorized capital stock of P1,500,000.00 divided into 1,500 shares with par value of P1,000.00 per share. That of the authorized capital stock of the corporation, 1,250 shares had been actually subscribed and P1,250,000.00 had been fully paid to the Treasurer-in-Trust of the corporation. The capital structure is as follows: Party Number of Shares Amount Paid Percentage of Subscribed (P) Equity (%) Kuok KKPI 735 735,000 58.80 Kuok Bros. 147 147,000 11.76 Sligo 147 147,000 11.76 Kuok (Singapore) 98 98,000 7.84 Kerry 98 98,000 7.84 SMC 18 18,000 1.44 Anscor 7 7,000 .56 1,250 1,250,000 100.00 ==== ======== ====== "2. After KSA shall have been incorporated, all the incorporators plan to increase its authorized capital stock from P1,500,000.00 to P3,600,000,000.00 divided into 3,600,000 shares with par value of P1,000 per share. That of the increased capital stock, 965,069 shares with a par value of P965,069,000.00 which is more than 25% of the increased authorized capital stock shall be subscribed and fully paid. The following will subscribe to the increased authorized capital stock: No. of Shares to Amount to be Paid Percentage of Party be subscribed (P) Equity (%) SMC 354,844 354,844,000 36.76877 Anscor 137,979 137,979,000 14.29732 Kuok KPPI 283,348 283,348,000 29.36039 Kuok Bros. 56,670 56,670,000 5.87212 Sligo 56,670 56,670,000 5.87212 Kuok (Singapore) 37,779 37,779,000 3.91464 Kerry 37,779 37,779,000 3.91464 965,069 965,069,000 100.00 ===== ======== ===== "3. The Kuok Group will fully pay their subscriptions in cash. SMC and Anscor will pay in full their subscriptions to the increased capital stock by transferring their respective real properties to the corporation with Fair Market Value of P492,823,000, to wit: A. San Miguel Corporation TCT NO. Location F M V Percentage of (P) Equity (%) 80575 & Ayala Ave., corner 354,844,000 36,76877 154037 Paseo de Roxas, corner De la Rosa Street, Makati, M.M. (4,8705 sq. m.) B. A. Soriano Corporation TCT No. Location F M V Percentage of (P) Equity (%) (852781) Ayala Ave., corner 137,979,000 14,29732 S-5871 Paseo de Roxas, Makati, M.M. (1,317 sq. m.) in exchange for 492,823 shares to the increased capital stock of KSA with par value of P492,823,000.00 "4. The Fair Market Value of the real properties, above, that will be transferred by way of capital contribution represents at least 51% of the subscription on the increased capital stock of KSA, and as a result of the exchange, SMC and Anscor will gain control of KSA by owning more than 51% of the total voting power of all classes of stocks entitled to vote. "5. The final subscription and paid up capital of KSA after the increase shall have been made will be as follows: No. of Shares Amount to be Percentage of Party Subscribed Paid-up (P) Equity (%) SMC 354,862 354,862,000 36.7230 Anscor 137,986 137,986,000 14.2795 Kuok KPPI 284,083 284,083,000 29.3985 Kuok Bros. 56,817 56,817,000 5.8793 Sligo 56,817 56,817,000 5.8793 Kuok (Singapore) 37,877 37,877,000 3.9197 Kerry 37,877 37,877,000 3.9197 966,319 966,319,000 100.0000 ====== ========= ======= 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 stock 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 stock in same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized both to the transferors and transferee corporation on the proposed transfer by SMC and Anscor of their respective real properties in exchange for shares of stock of KSA considering that after the proposed exchange of properties and as a result of the proposed exchange, the transferors will gain control of the transferee corporation. 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), Tax Code, as amended by Presidential Decree No. 1773). cdta In this connection, you are further advised that in order that the parties to the proposed 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 completed 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 or other basis thereof and the adjusted cost basis at the time of the transfer; 2. The kind of stock 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 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. The parties shall also cause to be annotated on the Transfer Certificate of Titles and at the back of the Certificate of Stocks, the date the deed of exchange was executed 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 a valuable consideration for transfer of real property. (Section 177, Documentary Stamp Tax Regulation). 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. 245-00-000-00-109-82 dated April, 06, 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 (25%) of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Finally, the certificate of stocks to be issued by KSA are, in all probability original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. Should the aforementioned proposed transaction materialize and after payment of the corresponding documentary stamp tax, the aforesaid real properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, KSA Realty Corporation. This ruling is being issued on the basis of the foregoing facts as represented. 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. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner