Tax Consequences on the Assignment and Transfer of Undivided Shares in Real Properties as Partial Payment of Subscribed Shares to Transferee

June 4, 1987 BIR RULING NO. 151-87 35 (c) (2) (c) 163-86 151-87 Gentlemen : This refers to your letter dated April 22, 1987 requesting a ruling declaring that no gain is recognized as a result of the assignment and transfer by your clients of their undivided shares in real properties to Benrose Realty and Development Corporation, as partial payment of their subscribed shares in said corporation pursuant to Section 38 (c)(2)(c) of the Tax Code, as amended, that your clients are not liable for income tax on account of said transfer, and that in lieu of a tax clearance, said ruling shall serve authority for the Register of Deeds concerned to effect the transfer of the real properties to Benrose Realty and Development Corporation. It is represented that on June 11, 1986, your clients organized Benrose Realty and Development Corporation with a capital stock of P4,250,000.00 divided into 42,500 shares at a par value of P100.00 per share, that the following are the incorporators of the corporation with the number of share subscribed and paid-up, viz: Name No. of Capital Amount Paid on Shares Stock Subscription Subscribed Subscribed Benjamin A. Barrera 25,404 P2,540,400.00 P2,464,800.00 Rose Marie Villamor 4,234 423,400.00 410,800.00 Benjamin R. Barrera, Jr. 4,234 423,400.00 410,800.00 Consuelo Almeda 4,234 423,400.00 410,800.00 Pilar B. Fernando 4,234 423,400.00 410,800.00 Araceli B. Avellana 1 100.00 100.00 TOTAL 42,341 P4,234,100.00 P4,108,100.00 ====== =========== =========== that except for Araceli B. Avellana, the abovementioned incorporators owned undivided shares in the following real properties: Transfer Certificate of Title Location Fair Market Value No. 139296 Makati P2,336,730.00 No. 167011 Manila 128,690.00 No. 167012) Manila No. 167013) Manila 291,190.00 No. 167014 Manila No. 167015 Manila 673,330.00 No. 176016 Manila 668,150.00 P4,098,090.00 =========== that the undivided shares of the incorporators in the aforementioned real properties are as follows: Incorporators Share Value of Share Benjamin A. Barrera 6/10 P2,458,800.00 Rose Marie B. Villamor 1/10 409,800.00 Benjamin R. Barrero, Jr. 1/10 409,800.00 Consuelo B. Almeda 1/10 409,800.00 Pilar B. Fernando 1/10 409,800.00 P4,098,000.00 =========== that on June 24, 1986, the abovementioned owner-incorporators assigned and transferred their undivided shares in the abovementioned real properties to Benrose Realty and Development Corporation as partial payment of their subscribed shares in said corporation, and that on February 3, 1987, the Securities and Exchange Commission approved the articles of incorporation of Benrose Realty and Development 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 Decree 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., subscribed and paid up, 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, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by your clients of their real properties as payment for the issuance of shares of stock of Benrose Realty and Development Corporation considering that after the exchange of properties and as a result of said exchange, the transferors will gain 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 of 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 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 of stock shall be the same as the original acquisition cost or adjusted cost basis to the transferors of the properties exchanged thereof; 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) and (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 transferors 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 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: iatdc 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 that 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 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 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 aforesaid deed. (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982). After payment of the corresponding documentary stamp tax, the aforesaid real properties may now be registered by the Register of Deeds concerned in the name of Benrose Realty and Development Corporation. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner