Transfer of Real Property for Shares of Stocks - Tax-Free Exchange

April 27, 1993 BIR RULING NO. 144-93 TRANSFER OF REAL PROPERTY FOR SHARES OF STOCKS TAX-FREE EXCHANGE 34 (c) (2) (C) 109-93 144-93 EDELCA Inc. 83 Mayon Street Sta. Mesa Heights Quezon City Attention: Eduardo C . Del Castillo III Corporate Secretary This refers to your letter dated March 24, 1993 requesting in effect, for a confirmation of your opinion that the transfer of properties Eduardo S. Del Castillo in favor of your company, Edelca, Inc. in exchange for its 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. cdta It is represented that Edelca, Inc. is a domestic corporations duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of P17,000,000.00 divided into 17,000 shares with a par value of P1,000.00 per share, which are subscribed as follows: Stockholder No. of Shares Amount Subscribed Edgardo S. Del Castillo 8,625 P8,625,000.00 Estefania S. Del Castillo 4,000 4,000,000.00 Leda S. Del Castillo 4,000 4,000,000.00 Isabel D. Del Castillo 135 135,000.00 Stephen D. Del Castillo 40 40,000.00 Ma. Asuncion D. Del Castillo 40 40,000.00 Rupert D. Del Castillo 40 40,000.00 Leo D. Del Castillo 40 40,000.00 Edgardo D. Del Castillo III 40 40,000.00 Ma. Isabel D. Del Castillo 40 40,000.00 Total 17,000 P17,000,000.00 ====== =========== that Edgardo S. Del Castillo, Estefania S. Del Castillo-Pamintuan, and Leda S. Del Castillo are absolute and registered owners of the following properties: EDGARDO S. DEL CASTILLO: a. Two (2) parcels of land and improvements thereon located at Sampaloc, Manila with the total area of 787.5 square meters, and covered by Transfer Certificates of Title Nos. 30089 & 30090 all issued by the Registry of Deeds of Manila; and b. One-Third (1/3) pro indiviso shares over parcels of land and improvements thereon situated in the City of Manila and Quezon City with the total area of 2,394.4 square meters, and covered by Transfer Certificates of Title Nos. 69246, 69247, 69249 and 71833 issued by the Registry of Deeds of Manila and Quezon City, respectively. ESTEFANIA S. DEL CASTILLO-PAMINTUAN: a. One-Third (1/3) pro-indiviso shares over parcels of land and improvements thereon situated in the City of Manila and Quezon City with the total area of 2,394.4 square meters, and covered by Transfer Certificates of Title Nos. 69246, 69247, 69249 & 71833 issued by the Registry of Deeds of Manila and Quezon City, respectively. LEDA S. DEL CASTILLO: a. One-Third (1/3) pro-indiviso shares over parcels of land and improvements thereon situated in the City of Manila and Quezon City with the total area of 2,394.4 square meters, and covered by Transfer Certificates of Title Nos. 69246, 69247, 69249 & 71833 issued by the Registry of Deeds of Manila and Quezon City, respectively. that on July 2, 1992, Edgardo S. Del Castillo, Estefania S. Del Castillo-Pamintuan and Leda S. Del Castillo executed a Deed of Assignment of their abovementioned properties in favor of Edelca, Inc. as full payment of their above subscriptions to the amount of P8,625,000.00, P4,000,000.00 and P4,000,000.00, respectively, or the total amount of P16,625,000.00; that as a result of the above transaction, the transferors gained control of the corporation by owning at least 51% of the total voting stock of the said 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 the 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 property 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 stocks 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 no gain or loss shall be recognized both to the transferors and transferee corporation on the transfer by Edgardo S. Del Castillo, Estefania S. Del Castillo-Pamintuan and Leda S. Del Castillo of their properties and the improvements thereon in favor of your company, Edelca, Inc. in exchange for its shares of stock, considering that as a consequence of the exchange, the said transferors gained control of your 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 stocks 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 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 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 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 Transfer Certificates of Titles and at the back of the Certificates 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 (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. 245-00-000-00-109-82 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 to Edelca, Co. Inc., are, in all probability original issues, which are subject to the 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, Edelca, Co. Inc. 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. cdta VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue