Tax Consequence of the Transfer of Certain Real Estate Properties

October 16, 1991 BIR RULING NO. 208-91 34 (c) (2) (c) 084-91 208-91 Gentlemen : This refers to your letter dated August 10, 1991 requesting for a ruling on the tax consequence of the transfer of certain real estate properties owned by your clients, Mrs. Enrica San Jose Vda. de Ferrer and Ms. Rosita Ferrer Bautista, in favor of the Ferrer Realty Development Corporation. It is represented that the Ferrer Realty Development Corporation (FRDC) is a domestic corporation duly registered with the SEC on August 20, 1986, with an original capitalization of one million pesos (P1,000,000.00) divided into 10,000 shares at P100 par value; that 25% of the authorized capital was subscribed and 25% thereof was paid as follows: Subscribed Percentage Amount Amount Number of Subscribed Paid on Share Shareholding Rosita San Jose Ferrer 1,500 60% P150,000.00 P37,500.00 Teresita F. Bautista-Tolentino 250 10% 25,000.00 6,250.00 Nelia F. Bautista 250 10% 25,000.00 6,250.00 Rodolfo F. Bautista 250 10% 25,000.00 6,250.00 Rosita F. Bautista-Ong 250 10% 25,000.00 6,250.00 TOTAL 2,500 100% P250,000.00 P62,500.00 ====== ====== =========== ========== that in view of the need of a bigger capital, FRDC adopted a resolution increasing its authorized capitalization from P1 Million to P2.65 Million; that relative thereto, the additional P1.65 Million shall be provided through capital infusion by Enrica San Jose Vda. de Ferrer and Rosita Ferrer Bautista by way of real properties located in Metro Manila, consisting of 5/8 interest in a 379.60 sq. m. of land and improvements at Lot 7-B-2, Block 830, Calle Merced, Paco, Manila registered under TCT No. 1389792 and another 5/8 interest in a 26.40 sq. m. piece of land and improvements at Lot 8-A, Block 830, Calle Herran, Paco, Manila under TCT No. 138793, equivalent to P450,000.00 with respect to Enrica San Jose Vda. de Ferrer, and of a 614 sq. m. residential lot and house at Kalachuchi St., Dasmarias Village, Makati, Metro Manila, registered under TCT No. 138797 valued at P1,200,000.00 as regards Rosita Ferrer Bautista; that in exchange for the transfer and conveyance of the said real properties, FRDC shall issue the following number of shares of stocks, as follows: Subscribed Percentage Amount Amount Number of of Subscribed Paid on Shares Shareholdings Subscription Enrica San Jose Vda. de Ferrer 4,500 23.68% P450,000.00 P450,000.00 Rosita Ferrer-Bautista 12,000 63.16% 1,200,000.00 1,200,000.00 TOTAL 16,500 P1,650,000.00 P1,650,000.00 ====== =========== =========== and that as a result, Enrica San Jose Vda. de Ferrer, and Rosita Ferrer Bautista shall gain control of the company to the extent of 94.73% of FRDC's common voting stock, summarized as follows: Subscribed Percentage Amount Amount Number of of Subscribed Paid on Shares Shareholdings Subscription Enrica San Jose Vda. de Ferrer 4,500 23.68% 450,000.00 450,000.00 Rosita S. Ferrer-Bautista 13,500 71.05% 1,350,000.00 1,237,500.00 Teresita F. Bautista-Tolentino 250 1.32% 25,000.00 6,250.00 Nelia F. Bautista 250 1.32% 25,000.00 6,250.00 Rodolfo F. Bautista 250 1.32% 25,000.00 6,250.00 Rosita F. Bautista-Ong 250 1.32% 25,000.00 6,250.00 TOTAL 19,000 100% P1,900,000.00 P1,712,500.00 ====== ====== ========== ========== In reply, please be informed 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 stocks in such corporation of which as a result of such exchange, said person, alone or together with other, 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 (s). 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. On the basis of the foregoing, no gain or loss shall be recognized both to the transferors and the transferee corporation, on the transfer by Enrica San Jose Vda. de Ferrer and Rosita S. Ferrer-Bautista of real properties in exchange for shares of stock of Ferrer, Realty Development Corporation inasmuch as the transferors will gain control of the transferee corporation, as a result of such exchange of properties. 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. Hence, 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 properties exchanged therefor; and that the cost basis to the transferee of the properties exchanged for stock shall be the same as it would be in the hands of transferors. (Section 34 (c) (5) (a) and (b), Tax Code, as amended by Presidential Decree No. 1773). Furthermore, you are 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 set forth: 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 properties transferred, or of their interest in such properties 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 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 stocks 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. The parties shall also cause to be annotated on the Transfer Certificate of Titles and at the back of the Certificate of Stocks, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties 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. 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. 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 stamps 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 twenty-five percent (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 the 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 stamp tax, the real property may be registered by the concerned Registry of Deeds in the name of the transferee corporation, Ferrer 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. aisadc Very truly yours, (SGD.) JOSE U. ONG Commissioner