Tax Consequence of the Transfer of Real Properties in Favor of the United Investors and Managers, Inc.

December 4, 1985 BIR RULING NO. 214-85 35 (c) (2) (c) 116-85 214-85 S i r : This refers to your letter dated November 13, 1985 requesting a ruling on the tax consequence of the transfer of your real properties in favor of the United Investors & Managers, Inc. cd It is represented that the United Investors & Managers, Inc., a domestic corporation duly registered with the Securities and Exchange Commission has an authorized capital stock of P3,000,000, divided into 30,000 common shares with a par value of P100.00 per share; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up, viz: Name No. of Shares Subscription Paid-In Arnaldo Africa 250 P25,000 P25,000 Aristeo Africa 250 P25,000 P25,000 Alfredo Africa 250 P25,000 P25,000 Alex Africa 250 P25,000 P25,000 Carina Africa 250 P25,000 P25,000 Adelfo Africa 250 P25,000 P25,000 Ariel Africa 250 P25,000 P25,000 Angelo Africa 250 P25,000 P25,000 Cecilia Africa 9,000 P900,000 P225,000 Alfredo Africa 9,000 P900,000 P225,000 that you and your spouse Cecilia Africa are the absolute and registered owners of certain parcels of land covered by the following Transfer Certificates of Title: TCT No. T-46549 of the Registry of Deeds of Lipa City TCT No. T-52429 of the Registry of Deeds of Lipa City TCT No. T-52430 of the Registry of Deeds of Lipa City TCT No. T-52431 of the Registry of Deeds of Lipa City TCT No. T-52432 of the Registry of Deeds of Lipa City TCT No. T-58993 of the Registry of Deeds of Lipa City TCT No. T-58991 of the Registry of Deeds of Lipa City TCT No. T-58992 of the Registry of Deeds of Lipa City TCT No. T-57795 of the Registry of Deeds of Lipa City TCT No. T-5385 of the Registry of Deeds of Lipa City TCT No. 30681 of the Registry of Deeds of Pasay City 1/2 portion of land covered by TCT No. 25519 of the Registry of Deeds of Lipa City that on November 22, 1985, a Deed of Assignment was executed by and between the corporation and you and your spouse whereby you transferred to the corporation said parcels of land together with the improvements thereon, in payment of the unpaid balance of P1,350,000 of your total subscription of P1,800,000 representing 18,000 shares of stock of said corporation; and that after the exchange and as a result of the exchange, you and your spouse, as transferors gained control of the corporation by owning 90% 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 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 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 fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount 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. cdtech Accordingly, no gain or loss shall be recognized both to you and your spouse, as transferors and the transferee corporation on the transfer of real properties made in payment of your unpaid subscription for shares of stock of United Investors & Managers, Inc., considering that after the exchange of the properties and as a result of the said exchange, you and your spouse, as transferors gained control of 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 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 stocks shall be the same as it would be in the hands of the transferors. (Section 35(c)(5)(a) & (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 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, 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, the aforementioned transaction is not subject to the donor's tax imposed by Section 121 of the Tax Code as there is no intention to donate on the part of any of the parties. Finally, 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 (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 April 6, 1982). Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner