Tax Consequence of the Transfer of Real Property in Favor of Lincoln Realty Corp.

November 5, 1985 BIR RULING NO. 192-85 35-c-2-c 188-84 192-85 S i r : This refers to your letter dated September 6, 1985 requesting a ruling on the tax consequence of the transfer by your client, Mr. Choa Thian of his real property in favor of Lincoln Realty Corporation. cd It is represented that Lincoln Realty Corporation, a domestic corporation and duly registered with the Securities and Exchange Commission has an authorized capital stock of P4,000,000.00 divided into 40,000 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: No. of Capital Stock Amount Paid on Name Shares Subscribed Subscription Choa Thian 9,000 P900,000.00 P900,000.00 Jacinto Choa Yu 1,617 161,700.00 161,700.00 Juan A. Tiu 1,617 161,700.00 161,700.00 Elena C.Y. Uy 3,000 300,000.00 300,000.00 Lina Lee 1,000 100,000.00 100,000.00 Total 16,234 P1,623,400.00 P1,623,400.00 ====== ============ ============ that on June 5, 1985 Mr. Choa Thian and the corporation executed a Deed of Assignment whereby Mr. Choa Thian in consideration of and as full payment of his subscription of 9,000 shares in the total amount of P900,000.00 transferred a parcel of land together with all the improvements existing thereon situated in Magdalena St., District of Tondo, Manila covered by TCT No. 61740 of the Registry of Deeds of Manila; and that after the exchange and as a result of such exchange, Mr. Choa Thian will gain control of the corporation by owning 55.44% of the total capital stock 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 Decrees 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 fifty-one (51%) per cent 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 transferor and transferee corporation on the transfer by Mr. Choa Thian of his real property in payment of his original subscription for shares of stock of Lincoln Realty Corporation, considering that as a result of the said exchange the transferor will gain control 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 transferor later sell or exchange the shares of stock acquired by him in the exchange, he 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 transferor 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 transferor. (Section 35(c)(5)(a) & (b), Tax Code as amended by Presidential Decree No. 1773). cdta 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. (a) The transferor must file with his 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 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 transferor; (2) A statement of the original acquisition cost or other basis of the properties in the hands of the transferor 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 transferor in the exchange; and (c) The fair market value as of the date of exchange of the capital stock issued to the transferor. 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, the aforementioned transaction is not subject to the donor's tax imposed by Section 121 of the Tax Code as there is no intention to donate on the part of any of the parties. Finally, 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). cdt Very truly yours, (SGD.) TOMAS C. TOLEDO Acting Commissioner