Tax Consequence of the Transfer of the Real Properties

1981 BIR RULING NO. 152-81 035-c 82-81 152-81 Mr. Edward Howard Leong 463 Pina Avenue Street Sampaloc, Manila S i r : This refers to your letter dated February 18, 1981 to the Revenue District Office, Revenue Region No. 4-C, San Pablo City, requesting a ruling on the tax consequence of the transfer of the real properties which you owned in common with Mr. Jesus Q. Tan in exchange for the shares of stock of Victoria Poultry Farms, Inc. cdti It appears that Victoria Poultry Farms , Inc. was incorporated on June 18, 1979; that the capital stock of the corporation is ten million (P10,000,000.00) pesos divided into one million (P1,000,000.00) shares with a par value of P10.00 per share; and that the following are the incorporators of the corporation, with the number of shares subscribed and paid up, viz: Name No. of shares Amount Amount subscribed subscribed Paid Jesus Q. Tan 70,000 P700,000.00 P175,000.00 Eufrosina G. Tan 20,000 200,000.00 50,000.00 Edward Howard C. Leong 50,000 500,000.00 125,000.00 Soledad M. Leong 20,000 200,000.00 50,000.00 Estrella Goco 20,000 200,000.00 50,000.00 Angelita T. Alcantara 10,000 100,000.00 25,000.00 Benjamin G. Tan 10,000 100,000.00 25,000.00 Total 200,000 P2,000,000.00 P500,000.00 ======= =========== ========= that on December 29, 1980, Messrs. Edward Howard C. Leong and Jesus Q. Tan executed a deed of exchange of their property located in Bo. San Rafael, San Pablo City and covered by Transfer Certificate of Title No. T-18168 in exchange for 39,810 shares of the unissued stock of the corporation valued at P398,100.00. 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 fifty-one (51%) per cent of the total voting power of all classes of stocks entitled to vote. 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. The transfer of the real property of Messrs. Leong and Tan in payment of the unissued shares of the transferee corporation resulted in the acquisition of additional stocks out of the unsubscribed capital stock. Since the said transferors were already in control of the corporation, their acquisition of additional stocks resulted in their gaining further control of the corporation. After the exchange, the transferors owned 67% of the total voting power of all classes of stocks entitled to vote. Accordingly, no gain or loss shall be recognized both to the transferors and the transferee corporation. cdtech 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 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 stock shall be the same as it would be in the hands of the transferors. (Section 35(c)(4) of the Tax Code.) In this connection, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gain 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 returns 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 property transferred, or of their respective interests in such property, together with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfers; (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 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 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 of the capital stock, as of the date of exchange, which was 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. cdta Very truly yours, RUBEN B. ANCHETA Acting Commissioner