Tax Consequence of the Transfer of Real Properties in Favor of a Domestic Corporation

June 18, 1987 BIR RULING NO. 171-87 35-c-2-c 049-87 171-87 Gentlemen : This refers to your letter dated May 18, 1987 requesting a ruling on the tax consequence of the transfer of spouses Bienvenido L. Torres and Milagros V. Torres of their real properties in favor of Torresville Realty, Inc. It is represented that Torresville Realty, Inc., a domestic corporation and duly registered with the Securities and Exchange Commission has an authorized capital stock of P5,000,000 divided into 50,000 shares with a par value of P100.00 per share; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up viz: NAME NO. OF SHARES AMOUNT PAID ON SUBSCRIBED SUBSCRIPTION IN PROPERTY IN CASH TOTAL Bienvenido L. Torres 9,000 P238,005.00 P11,995.00 P250,000.00 Milagros V. Torres 9,000 238,005.00 11,995.00 250,000.00 Roberto Torres 1,000 48,980.00 1,020.00 50,000.00 Bienvenido V. Torres, Jr. 1,000 12,500.00 12,500.00 Benjamin V. Torres 1,000 12,500.00 12,500.00 Melinda T. Luis 1,000 12,500.00 12,500.00 22,000 P524,990.00 P62,510.00 P587,500.00 ====== ========= ========= ========= that on March 26, 1987, the spouses Bienvenido L. Torres and Milagros V. Torres, in part settlement of the unpaid balances of their subscription in the amount of P650,000 each or a total of P1,300,000 assigned to the corporation their conjugal rights to the building existing on the parcel of land earlier transferred to the corporation which building has a market value of P843,000.00 together with their conjugal interests in the furniture and kitchen utensils found in the said building with a total value of P46,596.00, for a total of P889,596.00 or P444,798.00 for each of them, leaving a still unpaid balance in the total amount of P410,404.00 or P205,202.00 for each of them; that on May 8, 1987 the corporation sold to the major stockholders, spouses Bienvenido L. Torres and Milagros V. Torres the remaining unissued stock of the corporation worth P2,800,000, that on the same date, the spouses assigned in favor of the corporation their individual rights and interests in three (3) parcels of land situated in Manila covered by TCT's Nos. 158122, 158123 and 158124 all of the Registry of Deeds of Manila, with an aggregate market value of P616,180.00, together with the dormitory building standing thereon with a market value of P889,350.00 for a total of P1,505,530.00 and, in addition, they paid in cash the sum of P4,974.00 for a total of P1,510,504.00, that of the amount of P1,100,000.00 or P550,000.00 each, were applied in partial payment of their subscriptions to the new issues leaving an unpaid balance of P1,700,000 or P850,000.00 for each of them; that the difference of P410,404.00 was applied in full settlement of the balance of their initial subscriptions so that, the spouses have unpaid balance of only P850,000.00 each, and that after the exchange and as a result of the exchange, the transferors-spouses gained control of the corporation by owning more than 51% of the total voting power of all classes of stocks entitled to vote. 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 stock entitled to vote. Control is determined by the amount of stock received, i.e., subscribed and paid up, 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 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 spouses Bienvenido L. Torres and Milagros V. Torres of their real properties in partial payment of their subscription to the capital stock of Torresville Realty, Inc., considering that after the exchange of properties and as a result of the said exchange the transferors will gain further 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 stocks acquired by them in the 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 therefore, 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 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: 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 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 properties (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) adc After payment of the corresponding documentary stamp tax, the aforementioned real properties may now be registered by the Register of Deeds concerned in the name of Torresville Realty, Inc. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner