Transfer of Land Shares of Stock Exempt from Capital Gains Tax

May 4, 1993 BIR RULING NO. 181-93 TRANSFER OF LAND SHARES OF STOCK EXEMPT FROM CAPITAL GAINS TAX 34 (c) (2) (C) 081-93 181-93 Ms. Elizabeth Alcaraz 109 P. Gonzales Street Loyola Heights, Quezon City This refers to your letter, dated March 8, 1993, requesting in effect, for a confirmation of your opinion that no gain or loss is recognized on the transfer of real properties by the Spouses Eduardo S. Alcaraz and Esther A. Alcaraz to Wisma Indah Corporation, Inc., in exchange for its shares of stock, pursuant to Section 34(c) (2) and (6) (c) of the Tax Code, as amended. cdta It is represented that the Wisma Indah Corp. is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Two Million Pesos (P2,000,000.00), Philippine currency, divided into Twenty Thousand (20,000) shares with a par value of One Hundred Pesos (P100.00) per share; that the incorporators of the corporation, with the corresponding number of shares subscribed and paid-up are as follows: Amount Name No. of Shares Subscribed Amount Paid Eduardo S. Alcaraz 4,233 P423,300.00 P423,300.00 Esther A. Alcaraz 4,232 423,200.00 423,200.00 Edmund Dominic A. Alcaraz 250 25,000.00 6,250.00 Cecile Marie A. Alcaraz 250 25,000.00 6,250.00 Elizabeth Marie A. Alcaraz 250 25,000.00 6,250.00 Eunice A. Alcaraz 250 25,000.00 6,250.00 Total 9,465 P946,500.00 P871,500.00 ==== ========= ========= that the Spouses Eduardo S. Alcaraz and Esther A. Alcaraz are the absolute owners of four (4) parcels of land situated in the Barrio of San Dionisio, Paraaque, Metro Manila, and Quezon City, and covered by Transfer Certificate of Title Nos. S-33093 and 33094, issued by the Register of Deeds for Metro Manila District IV and Certificate of Title Nos. 269310 and 283610, issued by the Register of Deeds for Metro Manila II; that on August 10, 1990, a Deed of Assignment was executed by and between the Spouses Eduardo S. Alcaraz and Esther A. Alcaraz and Wisma Indah Corporation, whereby the spouses transferred to the latter the abovementioned property in exchange for their unpaid subscription to the capital stock of the corporation; that as a result of the above transaction, the spouses gained control of the corporation by owning at least 51% of the total voting stock of the said corporation; and that in support of your request, you submitted to this Office, the following documents: 1. Deed of Assignment; 2. Articles of Incorporation of Wisma Indah Corporation; 3. Transfer Certificate of Title; 4. Tax Declaration; 5. Certification as to the original or historical cost of acquisition of the property; 6. Certification of Fair Market Value; and 7. Certification of its authorized capitalization and of percentage of ownership of stock of transferors after transfer of property. 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 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 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 the transferee corporation on the transfer by Spouses Eduardo S. Alcaraz and Esther A. Alcaraz of their properties in exchange for shares of stock of the transferee corporation, Wisma Indah Corporation, considering that as a consequence of the exchange, the Spouses gained control of the transferee 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 stock 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 the shares shall be the same as the original acquisition cost or adjusted cost basis to the transferors of the property exchanged therefor; and that the cost basis to the transferee of the property 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)(2) 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 property transferred, or of their interest in such property, 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 property received from the transferors; 2. A statement of the original acquisition cost or other basis of the property 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 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. 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 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 by the Wisma Indah Corporation 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 property may be registered by the Register of Deeds concerned in the name of the transferee corporation, Wisma Indah Corporation. 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