Tax Consequence of the Transfer of Real Property and Equipment, Supplies, Wares and Articles Used in a Restaurant Business

May 4, 1988 BIR RULING NO. 188-88 35 (c) (2) (c) 402-87 188-88 Gentlemen : This refers to your letter dated February 12, 1988 requesting a ruling on the tax consequence of the transfer of your clients, spouses Alejandro P. Prieto and Marixi E. Prieto of their real property and equipment, supplies, wares and articles used in a restaurant business in favor of the Marilex Realty Development Corporation. cdta It is represented that Marilex Realty Corporation is a domestic corporation whose primary purpose is to buy, sell, deal in, lease, mortgage, hold, manage, administer, improve, subdivide and otherwise dispose of lands, houses and buildings or any interest therein; that the corporation has an authorized capital stock of ten thousand (10,000) shares without par value; that the value of each share of stock which has been subscribed shall be fifty (P50.00) pesos; that the remaining shares of stock without par value shall be issued for such consideration as, from time to time may be fixed by the Board of Directors of the corporation provided that no share of stock without par value shall be issued for a consideration less than P5.00; that the capital stock of the corporation actually subscribed is two thousand (2,000) shares worth One Hundred Thousand (P100,000.00) pesos; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up, viz: No. of shares Amount of Capital Amount Paid Names Subscribed Stock Subscribed on Subscription Marixi E. Prieto 1,000 P50,000 P50,000.00 Alejandro Prieto 997 49,850 49,850.00 Macario Rufino 1 50 50.00 Ma. Paz R. Laurel 1 50 50.00 Carlos S. Rufino 1 50 50.00 2,000 P100,000 P100,000.00 ====== ======= ========= that on May 5, 1983 a Deed of Assignment was executed by spouses, Alejandro R. Prieto and Marixi E. Prieto and the corporation whereby the transferors transferred and conveyed to the corporation a parcel of land covered by TCT No. 95192 situated in Makati, Metro Manila and certain equipment, supplies, wares and articles used in a restaurant business in exchange for the corporation's common shares of stock; that the parties agreed that the valuation of the parcel of land and the equipment, supplies, wares and articles used in a restaurant business shall be P1,767,740.00 and P26,735.20 respectively; that the valuation of the common shares of stock shall be the same as the properties transferred; and that after the exchange and as a result of the exchange, the transferors who are already in control of the corporation gained further control by owing more than 51% of the total voting power of all classes of stocks entitled to vote. In reply, 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 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 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 your client, spouses Alejandro R. Prieto and Marixi E. Prieto of their real property as well as certain equipment, supplies and articles in exchange for shares of stock of the transferee-corporation, considering that after the exchange of properties and as a result of said exchange, the transferors will gain further control of the transferee corporation. cdtech It should be emphasized, however, that Section 34(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 34(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 34(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 property transferred, or of their interest 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 transfer; 2. The kind of stock received and preference if any; acd 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 the property received from the transferors; 2. A statement of the original acquisition cost of other basis of the property in the hands of the transferors and the adjusted cost basis thereof at the time of the transfer and; a. The total issued and outstanding capital stock prior to and immediately after the exchange, with a complete description of each class of stocks; 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 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 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 or 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, on the aforesaid deed. (BIR Ruling No. 245-00-000-00-102-82 dated April 6, 1982) Furthermore, under Section 248(d) in relation to Section 173 of the Tax Code as amended by Executive Order No. 273, in case of failure to affix the proper documentary stamp to a document or instrument, there shall, for every violation, the imposed, in addition to the amount of documentary stamp tax required to be paid, an amount equivalent to twenty-five percent of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Finally, the abovementioned transaction shall not be subject to the gift tax as there is no intention to donate on the part of any of the parties. After payment of the corresponding documentary stamp tax, the aforesaid real property may now be registered by the Register of Deeds concerned in the name of Marilex Realty Development Corporation. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner