Tax Consequence of Contemplated Transfer by Spouses Muñoz of Their Real Properties in Favor of Muñoz Land Devt. Corp.

November 12, 1985 BIR RULING NO. 203-85 35-c-2-c 116-85 203-85 Gentlemen : This refers to your letter dated September 26, 1985, requesting a ruling on the tax consequence of the contemplated transfer by your clients, spouses Demetrio A. Muoz and Rosalina L. Muoz of their real properties in favor of Muoz Land Development Corporation. cdt It is represented that Muoz Land Development Corporation, a domestic corporation, whose registration with the Securities and Exchange Commission is still pending, has an authorized capital stock of P8,000,000 divided into 80,000 shares with a par value of P100 per share; that of the authorized capital stock of the corporation, P2,000,000 has been actually subscribed; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up, viz: NO. OF SHARES AMT. PAID ON NAME SUBSCRIBED SUBSCRIPTION SUBSCRIPTION Demetrio A. Muoz 9,200 P920,000.00 P894,000.00 Rosalina L. Muoz 9,200 920,000.00 894,000.00 Demetrio L. Muoz, Jr. 400 40,000.00 15,500.00 Asuncion I. Muoz 400 40,000.00 15,500.00 Chita M. Briones 400 40,000.00 15,500.00 Nancy M. Chiongbian 200 20,000.00 8,000.00 Erwin Chiongbian 200 20,000.00 8,000.00 20,000 P2,000,000.00 P1,850,000.00 ===== ========= ========= that the spouses are the absolute and exclusive owners in fee simple of thirty-seven (37) parcels of land (excluding 87,091 square meters more or less which is tenanted) all situated in the Barrio of Baruya, Lubao, Pampanga and three (3) parcels of land all situated in the Barrio of Sta. Catalina, Minalin, Pampanga; that the fair market value of the forty (40) parcels of land as appraised by the Asian Appraisal Company, Inc., is P1,778,000.00; that on May 1984, a Deed of Assignment was executed by and between the spouses and the corporation whereby the spouses transferred to the corporation said parcels of land in full payment of their subscription to the capital stock of the corporation; and that after the exchange and as a result of the exchange, the transferors gained control of the corporation by owning 97% of the total voting power of all classes of stocks entitled to vote. 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 stock 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. cdti Accordingly, no gain or loss shall be recognized both to transferors and the transferee corporation on the transfer by the spouses Demetrio A. Muoz and Rosalina L. Muoz of their real properties in payment of their subscription for shares of stock of the Muoz Land Development Corporation considering that after the contemplated exchange of properties and as a result of the said exchange the transferors 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 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 of 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 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 transferors must 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 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 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; b. The classes of stock 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 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 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) Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner