Transfer of Property for Stocks - Tax-Free Exchange

May 11, 1993 BIR RULING NO. 205-93 TRANSFER OF PROPERTY FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) (C) 52-93 205-93 Mr. Geronimo C. Jiao #87 Talayan Street Quezon City This refers to your letter dated November 9, 1992, requesting in effect, a confirmation of your opinion that the transfer of your conjugal property in favor of Arlinor Realty Development Corporation in exchange for its shares of stock in accordance with Revenue Memorandum Order NO. 26-92, falls under Section 34(c)(2)(c) of the Tax Code, as amended. aisadc It is represented that Arlinor Realty Development Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of P8,500,000.00, divided into 85,000 shares with a par value of P100.00 per share, of which 70,000 shares were subscribed and paid as follows: No. of Shares Amount Subscribed Stockholder Subscribed and Paid-Up Geronimo C. Jiao 35,000 P3,500,000.00 Felicitas Q. Jiao 34,700 3,470,000.00 Arnel Q. Jiao 100 10,000.00 Lizette C. Jiao-Racela 100 10,000.00 Norman Q. Jiao 100 10,000.00 Total 70,000 P7,000,000.00 ====== =========== that you and your wife, Felicitas D. Jiao, are the absolute and registered owners of a parcel of land situated in Murphy, Cubao, Quezon City, covered by the Transfer Certificate of Title No. 66056 issued by the Register of Deeds of Quezon City; that on October 23, 1992, you and your wife, Felicitas D. Jiao, executed a Deed of Assignment of the abovementioned conjugal property in favor of Arlinor Realty Development Corporation in exchange for additional 6,003 shares of stock (3,003 shares for Dr. Geronimo C. Jiao and 3,000 shares for Mrs. Felicitas Q. Jiao); that as a result of the above transaction, you and your wife, Mrs. Felicitas Q. Jiao); that as a result of the above transaction, you and your wife, Mrs. Felicitas Q. Jiao, gained control of the corporation by owning at least 51% of the total voting stock of the said corporation, as follows: No. of Shares Amount Subscribed Stockholder Subscribed and Paid-Up Geronimo C. Jiao 38,003 P3,800,300.00 Felicitas Q. Jiao 37,700 3,770,000.00 Arnel Q. Jiao 100 10,000.00 Lizette C. Jiao-Racela 100 10,000.00 Norman Q. Jiao 100 10,000.00 Total 76,003 P7,600,300.00 ====== =========== that in support of your request, you submitted to this Office photocopies of the following documents: (a) deed of exchange; (b) articles of incorporation, duly registered with the SEC, of the transferee corporation; (c) copies of the transfer certificate of title and the corresponding tax declaration; (d) certification as to the original or historical cost of acquisition/adjusted cost basis of the property transferred; (e) certification by the corporate secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stock; (f) certification of percentage of ownership of the shares of stock by the transferor as a result of the transaction; and (g) other pertinent documents. In reply thereto, 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 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. Accordingly, your opinion that no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by you and your wife, Felicitas Q. Jiao, of your property in exchange for shares of stock of the transferee corporation, Arlinor Realty Development Corporation, considering that as a consequence of the exchange, the transferors gained control of the transferee corporation, is hereby confirmed. It should be emphasized, however, that Section 34(c) (2) (c) 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 transferors later sell or exchange the shares of stock acquired by them in the exchange, they 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 transferors 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 transferors [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 property transferred, or of their interest in such property, 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 the property 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 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, 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. The parties shall also cause to be annotated on the Transfer Certificate of Title and at the back of the Certificates of Stock, the date the deed of exchange was executed, the original or historical cost of acquisition of the property 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 certificates of stock to be issued to Arlinor Realty Development 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 stamps tax, the real property may be registered by the Register of Deeds concerned in the name of the transferee corporation, Arlinor Realty Development 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