Transfer of Real Property for Shares of Stock Exempt from Capital Gains Tax

May 5, 1993 BIR RULING NO. 191-93 TRANSFER OF REAL PROPERTY FOR SHARES OF STOCK EXEMPT FROM CAPITAL GAINS TAX 34 (c) (2) (C) 081-93 191-93 Angara, Abello, Concepcion, Regala & Cruz ACCRA Building 122 Gamboa St., Legaspi Village Makati, Metro Manila Attention: Atty . J . M . Emmanuel A . Caral This refers to your letter, dated October 23, 1992, requesting in effect, for a confirmation of your opinion that no gain or loss is recognized on the transfer of real property by Mr. Wilfredo C. Tecson to the Solid Concorde Corporation in exchange for its shares of stock, pursuant to Section 34(c) (2) and (6) (c) of the Tax Code, as amended. It is represented that the Solid Concorde Corporation is a domestic corporation, duly registered with the Securities and Exchange Commission with an authorized capital stock of Twelve Million Pesos (P12,000,000.00), Philippine currency, consisting of One Hundred Twenty Thousand (120,000) 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 Wilfrido C. Tecson 29,996 P2,999,600.00 P749,600.00 Florencia G. Tecson 1 100.00 100.00 Flavio P. Gutierrez 1 100.00 100.00 Salvador L. Pea 1 100.00 100.00 Ma. Jose Emmanuel 1 100.00 100.00 Total 30,000 P3,000,000.00 P750,000.00 ====== =========== ========= that Mr. Wilfrido C. Tecson is the owner of two (2) parcels of land situated at 147 Yakal St., Makati, Metro Manila, and covered by Transfer Certificates of Title Nos. 181677 and 181678, issued by the Register of Deeds of Makati, Metro Manila; that on October 6, 1992, a Deed of Conveyance of Real Property was executed by and between Wilfrido C. Tecson and Solid Concorde Corporation, whereby the former transferred to the latter the abovementioned properties in exchange for his unpaid subscription to the capital stock of the corporation; that as a result of the above transaction, Wilfrido C. Tecson 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: a) Articles of Incorporation of Solid Concorde Corp.; b) Secretary's certificate of a Board Resolution of Solid Concorde Corporation, dated 29 September 1992; c) Deed of Assignment of real property in exchange for shares of stocks; d) Transfer Certificate of Title No. 181677 of the Registry of Deeds of Makati; e) Transfer Certificate of Title No. 181678 of the Registry of Deeds of Makati; and f) Tax declaration as of September 1992. In reply thereto, I have the honor to inform you that pursuant to Section 34, paragraph (c) (2) (c) of the Tax Code, 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 of ownership, only those persons who transferred property for stocks in the same transaction may be counted up to a maximum of five. aisadc Accordingly, your opinion that no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by Wilfrido C. Tecson of his properties in exchange for shares of stock of the transferee corporation, Solid Concorde Corporation, is hereby confirmed. It should be emphasized, however, that Section 34(c) (2) paragraph (2) 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 transferor later sells or exchanges the shares of stock acquired by him in the exchange, he 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 transferor 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 transferor [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) (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 transaction 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/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 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; cd 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, permanents 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. The parties shall also cause to be annotated on the Transfer Certificate of Titles and at the back of the Certificate of Stocks, the date the deed of 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 Solid Concorde 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, Solid Concorde 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. VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue