Tax Consequence of the Transfer of Real Property in Exchange of Shares of Stocks

December 21, 1984 BIR RULING NO. 188-84 35c2c-210-83-188-84 Gentlemen : This refers to your letter dated October 12, 1984 requesting a ruling on the tax consequence of the transfer by Messrs. Jorge S. Go, David Yukimteng, David Chuansu, Fernando Lim, Marina Chua and John Gobenghuy of their real property in favor of JFG Realty Development Corporation. It is represented that JFG Realty Corporation a domestic corporation and duly registered with the Securities and Exchange Commission has authorized capital stock of P12,000,000.00 divided into 120,000 common 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 Subscription Paid-In Jorge S. Go 6,000 P 600,000 P150,000 David Yukimteng 5,000 500,000 125,000 David Chuansu 5,000 500,000 125,000 Fernando Lim 5,000 500,000 125,000 Marina Chua 5,000 500,000 125,000 John Gobenghuy 4,000 400,000 100,000 30,000 P3,000,000 P750,000 ====== ======== ======= that the aforementioned incorporators who are married except Marina Chua who is single are the registered co-owners pro-indiviso of a parcel of land situated in the City of Manila with an acquisition cost of P1,461,600.00; that the six incorporators-co-owners intend to transfer the said property to the corporation in exchange for common shares of stock of the latter; that after the exchange and as a result of the exchange, the subscriptions, stock-ownership and interest in the corporation for each and all of the transferors will be as follows: Subscription & % of Name No. of Shares Stock-Ownership Ownership Jorge S. Go 8,436 P843,600) David Yukimteng 7,436 743,600) David Chuansu 7,436 743,600) .8557 Fernando Lim 7,436 743,600) Marina Chua 7,436 743,600) John Gobenghuy 6,436 643,600) .1443 44,616 P4,461,600 100% ====== ======== ====== that as a result of such exchange, even just five of the transferors will maintain control of the corporation by owning more than 51% of the total voting power of all classes of stocks entitled to vote of the 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. 1703 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" mean ownership of stocks in a corporation possessing at least fifty-one (51%) percent 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 for services, by the transferors. In determining the 51% stock ownership, only those persons who transferred property for stock in the same transactions may be counted up to a maximum of five. The statutory requirement that " said person, alone or together with others, not exceeding four persons, gains control of said corporation" shall be understood to mean that any number of persons may exchange property for stocks provided that, as a result of the transaction, not more than five transferors would control the corporation . Accordingly, no gain or loss shall be recognized to each of the six (6) transferors aforenamed and the transferee corporation, considering that after the exchange of property and as a result of the said exchange not more than five (5) of the transferors will gain control of the transferee corporation by owning 85% of the total voting power of all classes of stocks entitled to vote of the 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 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 therefor; 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. casia (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 of other basis thereof and the adjusted cost basis at the time of the transfer; 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 properties received from the transferors; 2. A statement of the original acquisition cost 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 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) Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner