Tax Consequence of the Transfer of Real Property by a Person to a Corporation in Exchange for the Latter's Shares of Stocks

July 8, 1987 BIR RULING NO. 196-87 35 (c) (2) (c) 164-87 196-87 Gentlemen : This refers to your letter dated July 2, 1987 requesting a ruling on the tax consequence of the transfer by your client, Mrs. Luz S. Lim of her real property in favor of L. and A. Enterprises, Inc. It is represented that L and A Enterprises, Inc., a domestic corporation and duly registered with the Securities and Exchange Commission has an authorized capital stock of P10,000.00 divided into 100,000 shares with a par value of P100.00 per share; that the following are the stockholders of the corporation with the number of shares subscribed and paid-up viz: NAME No. of Shares Capital Stock Amount Paid On Subscribed Subscribed Subscription Peter Lim, Jr. 800 P80,000.00 P20,000.00 Luz S. Lim 600 60,000.00 15,000.00 Norberto Sy Eng Chong 300 30,000.00 7,500.00 Florencio Sy 200 20,000.00 5,000.00 Ramon S.I. Sheng 100 10,000.00 2,500.00 2,000 P200,000.00 P50,000.00 ===== ========= ========= that Mrs. Luz S. Lim is the owner of one (1) parcel of land located at Bo. Sta. Lucia, San Juan, Metro Manila and covered by TCT No. (402823) 9-14369 of the Registry of Deeds for the Province of Rizal; that a Deed of Exchange was executed by Mrs. Luz S. Lim and the corporation whereby Mrs. Luz S. Lim transferred to the corporation said parcel of land in exchange for 5,190 shares of the corporation; and that after the exchange and as a result of the exchange, the transferor gained control of the corporation by owning 51% of the total voting power of all classes of stocks entitled to vote. atdc 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. 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 transferor and the transferee corporation on the transfer by Mrs. Luz S. Lim of her property in exchange for shares of stock of the corporation considering that after the exchange of property and as a result of the said exchange the transferor will gain control of the said 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 sells or exchanges the shares of stock acquired by her in the exchange, she 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 property 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) 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. (a) The transferor must file with her 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 her 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 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: adc 1. A complete description of the property received from the transferor; 2. A statement of the original acquisition cost or other basis of the property 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 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 taxpayer 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 (Sections 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). 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 L and A Enterprises, Inc. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner