No Gain or Loss Shall be Recognized if a Person Exchanges His Property for Stock in a Corporation

August 8, 1991 BIR RULING NO. 149-91 34 (c) (2) (c) 085-90 149-91 Gentlemen : This refers to your letter dated April 6, 1990 requesting in behalf of your client, ROF Development & Management Corporation (ROF) confirmation of your opinion that no gain or loss is recognized on the transfer of real property by the Spouses Raymundo O. Feliciano and Zita F. Feliciano to ROF in exchange for its shares of stock pursuant to Section 34 (c) (2) and (6) (c) of the Tax Code, as amended. It is represented that ROF is a domestic corporation incorporated on October 24, 1978 under SEC Registration No. 82485 principally to carry on the general business of furnishing services either as principals, advisers, or representatives for any family owned or affiliated individual, firm, association, enterprises or corporation engaged in any business and industry; that it has an authorized capital stock of 10,000 without par value shares, of which 2,000 shares with a stated value of P5.00 each had been initially subscribed by the following stockholders as reflected in its Articles of Incorporation, viz: cdt NO. OF SHARES NO. OF SHARES NAME SUBSCRIBED SUBSCRIBED/PAID UP 1. Raymundo F. Feliciano 1,000 P5,000.00 2. Zita F. Feliciano 996 4,980.00 3. Roberto Feliciano 1 5.00 4. Ma. Regina Feliciano 1 5.00 5. Ma. Rita Feliciano 1 5.00 6. Ma. Zita F. Gonzales 1 5.00 2,000 Shares P10,000.00 ========= ======== that on September 4, 1979, the Spouses Raymundo O. Feliciano and Zita F. Feliciano executed two (2) Deeds of Exchange with Assumption of Mortgage over their parcels of land in favor of ROF in exchange for the issuance of 1,837 shares at an issue value of P1,000.00 per share; that on September 6, 1979, another Deed of Exchange but without any assumption of mortgage, was further executed by the transferors over other parcels of land owned by them in favor of ROF in exchange for the issuance of 258 shares at an issue value of P1,000.00 per share; that the sum total of the ROF shares to which the transferors are entitled under the said two (2) Deeds of Exchange is 2,095 which comprise 67% of the Outstanding Capital Stock of ROF; and that considering that the said exchange took place in 1979, you are likewise of the opinion that the then amendments introduced by Presidential Decree No. 1959 and Executive Order No. 173 pertinent to documentary stamp taxation shall not be made to apply in the instant case. In reply, I have the honor to inform you that pursuant to then Section 35 paragraph (c) (2) (c) of the Tax Code, as amended by Republic Act No. 4522, no gain or loss shall be recognized if a person exchanges his property for stock in 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 stock received, i.e. subscribed, whether for property or 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, your opinion to the effect that no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfers of the Spouses Raymundo D. Feliciano and Zita F. Feliciano of their properties in exchange for shares of stock of the transferee corporation, considering that after the said exchange transactions and as a result of the said exchange transactions the Spouses gained, and in a subsequent exchange transaction that followed, further gained, control of the transferee corporation, ROF Development & Management Corporation is hereby confirmed. It should be emphasized, however, that then Section 35 (c) (2) (c) of the Tax Code merely defers recognition of gain or loss from such transactions, for in determining the gain or loss from a subsequent transaction of the properties or of the stocks involved in the exchanges, the original or historical cost of the properties or the stocks is considered. Thus, if the transferor later sell or exchange the shares of stock acquired by them in the exchange transactions, 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 exchange therefor, and that the cost basis of 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) (4) (a) & (b), Tax Code]. If pursuant to the exchange transactions, and as part of the consideration, the transferee corporation assumes the liability of the transferors or acquires from the transferors properties subject to a liability, such assumed or acquired liability shall not be treated as money and/or other property, and shall not prevent the exchange transactions from being tax-free. [See then Section 35 (c) (3) (c), Tax Code, as amended by Sec. 1, Republic Act No. 4522] No gain or loss shall be recognized on the obligation assumed by the transferee corporation. However, irrespective of whether the shares of stock adverted to, in the instant case, were issued on the basis of their book value or assessed value, the value of such shares to the aforenamed spouses would depend on whether or not the liability transferees and assumed by the transferee corporation exceeds their (transferors') basis on the original and/or acquisition cost of the properties transferred. The cost basis or value of the stocks received by the transferor of property subject to a liability, where the liability transferred assumed by the transferee corporation does not exceed the transferor's basis or the original and/or acquisition cost of the property or properties transferred, shall be the difference between the liability or liabilities assumed by the transferee corporation and the acquisition or original cost of the property transferred. On the other hand, where the total liabilities to be assumed by the transferee corporation exceed the original or acquisition cost of the property or properties transferred, the excess shall be recognized as gain to the transferor or transferors and the value or cost basis of the stocks to the transferor or transferors shall be the difference between the original cost of the property or properties transferred subject to a liability (plus the gain recognized to the transferor or transferors) and the liability or liabilities assumed by the transferee corporation. [Sec. 35 (c) (4) (a) and (b) Tax Code]. In this connection, you are further advised that in order that the parties to the exchange transactions can avail of the non-recognition of gains provided for in Section 35 (c) (2) (c) of the Tax Code, 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 transactions were consummated a complete statement of all facts pertinent to the exchange transactions, including: 1. A description of the properties transferred, or their interest in such properties, together with a statement of the original acquisition cost or other basis thereof at the time of transfer; 2. The kind of stocks 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. On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange transactions were consummated the following: 1. A complete description of all property received from the transferors; 2. A statement of the original acquisition cost or other basis thereof in the hands of the transferors and the adjusted cost basis at the time of the transfer; 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 each exchange transactions, with complete description of each class of stock; (b) The classes of stock and number of shares issued to the transferors in the exchange transactions; and (c) The fair market value as of the date of each exchange transaction 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 transactions, 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 transactions. 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 of 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. cdtech Moreover, pursuant to that Section 233 of the Tax Code, 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 parcels of land, are 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 deeds executed on the aforesaid transfers. (BIR Ruling No. 109-82 dated April 6, 1982) The value shall be the fair market value which shall not be less than the par value of the stocks. Furthermore, under then Section 239 of the Tax Code, any person who fails to affix, the correct amount of documentary stamp tax to any taxable document, instrument, or papers, or to cancel in the manner prescribed in then Section 237 of the same Code any document, instrument, or paper; shall be subject to a fine of not less than twenty pesos or more than three hundred pesos. Finally, the certificates of stocks to be issue/issued by ROF pursuant to the said exchange transactions are in all probability, original issues which are subject to the documentary stamp tax imposed by then Section 212 of the Tax Code. After payment of the corresponding documentary stamp tax, the aforesaid real property may be registered by the Register of Deeds concerned in the name of ROF Development & Management Corporation (ROF). 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 ruling letter is not complied with, this ruling shall be considered null and void. cdta Very truly yours, (SGD.) JOSE U. ONG Commissioner