Tax Consequence of the Proposed Transfer

September 12, 1989 BIR RULING NO. 199-89 34 (c) (2) (c) 116-89 199-89 Gentlemen : This refers to your letter dated July 17, 1989 stating that Ricardo, Elizabeth, Philip, Stephen and Roseanne, all surnamed Cu Unjieng, are the owners of a parcel of land located in Binondo, Manila covered by TCT No. 167162 of the Registry of Deeds of the City of Manila, with an area of 926.20 square meters, more or less; that they were offered by your client, Roman Square Corporation, P11.0 Million worth of fully paid shares of its common stocks in exchange for the assignment and transfer of said lot in favor of your client; that your client intends to construct a condominium on said lot; that your client, a domestic corporation duly registered with the Securities and Exchange Commission, has an authorized capital of P25 Million, and subscribed capital of P10 Million, which is fully paid-up; and that the Cu Unjiengs would like to accept this offer provided the following conditions are met: cdt 1. Your client in exchange for TCT No. 167162 will issue in their favor 11,000,000 shares at P1 par value or a total to P11 Million worth of shares of stock. There being only common stocks in your client, the newly issued shares of 11 Million will be voting shares. 2. A BIR confirmation and ruling be obtained on your legal advice and opinion given to the Cu Unjiengs that no gain or loss is recognized from this exchange of properties pursuant to Section 34(c)(2)(c) of the Tax Code, as amended. Based on the foregoing, you now request a ruling confirming your opinion to the effect that no gain or loss shall be recognized on the proposed transfer of the Cu Unjiengs of their property in favor of Roman Square Corporation in exchange for its shares of stock considering that after the proposed exchange of property and as a result of the proposed exchange, the Cu Unjiengs will gain control of the said corporation pursuant to Section 34(c)(2)(c) of the Tax Code, as amended. 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 stock entitled to vote. Control is determined by the amount of stocks received, i.e., subscribed, 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, your opinion that, no gain or loss shall be recognized both to the transferors and transferee corporation on the proposed transfer of Messrs. Ricardo, Philip, Stephen and Mesdames Elizabeth and Roseanne Cu Unjieng of their property in exchange for shares of stock of your client, considering that after the proposed exchange and as a result of the proposed exchange they will gain control of the transferee corporation, Roman Square Corporation, is hereby confirmed. 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 property or stocks involved in the exchange, the original or historical cost of the property or 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 property exchanged therefor; and that the cost basis to the transferee of the property exchange 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, or for 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 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 the property received from the transferors; 2. A statement of the original acquisition cost or other basis of the property, 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; 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/property 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 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 to be executed for the purpose of said exchange. (BIR Ruling No. 245-00-000-00-109-82 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, be imposed, in addition to the amount of documentary stamp tax required to be paid, an amount equivalent to 25 % of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Finally, the certificates of stocks to be issued by Roman Square 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. Very truly yours, (SGD.) JOSE U. ONG Commissioner