Transfer of Lands for Stocks bet. Two Corporations - Tax Exempt

May 14, 1993 BIR RULING NO. 215-93 TRANSFER OF LANDS FOR STOCKS BET. TWO CORPORATIONS TAX EXEMPT 94 (a) (3) 182-90 215-93 Castillo, Laman Tan & Pantaleon The Valero Tower 122 Valero Street, Salcedo Village 1227 Makati, Metro Manila Attention: Atty . Pulo S . Pantaleon and Atty . Ma . Victoria D . Sarmiento This refers to your letter dated February 22, 1993 stating that the following landowners: Fil-Estate Management, Inc. La Paz Housing and Development Corporation Greenfield Development Corporation Carmona Realty Development Corporation Grandview Realty Corporation Southern Heights Land Development Corporation South Coast Realty Corporation cdtech Fil-Estate Golf and Development, Inc. Boston Bank of the Philippines, (now Bank of Commerce), trustee for College Assurance Plan of the Philippines, Inc. who all contributed their continuous or adjacent landholdings in Carmona, Cavite and Bian, Laguna, with a total area comprising about 4,051,469 sq. meters, for development into an integrated residential subdivision, golf course and commercial center (the "Project"); that having contributed their landholdings into the Project, the landowners then assigned to each one of them a "Participating Interest" corresponding, in every landowner's case, to the proportion that the area of realty contributed bears to the aggregate area of the Project; that the landowner's land contributions in square meters and the Participating Interest corresponding to each landowner is shown as follows: Land. Contributed Landowner to the Project Participating (sqm. m.) Interest Fil-Estate Management, Inc. 95,144 2.34838% La Paz Housing and Development Corporation 644,528 15.90859% Greenfield Development Corporation 346,038 8.54105% Carmona Realty Development Corporation 342,288 8.44849% Grandview Realty Corporation 388,358 9.58561% Southern Heights Land Development Corporation 1,576,119 38.90241% South Coast Realty Corporation 407,351 10.05440% Fil-Estate Golf and Development, Inc. 94,276 2.32696% Boston Bank ITF CAP (now: Bank of Commerce), trustee for College Assurance Plan of the Philippines, Inc. Trust Fund 157,367 3.88420% 4,051,469 100.00000% ======== ========= that based on each landowner's Participating Interest, the landowners apportioned among themselves the land pertaining to the golf course, the commercial are and the residential area, ignoring original locations and internal boundaries as follows: Landowners Participating Allocated Area Golf Residential Commercial Course (Sq.m.) (Sq.m.) (Sq.m.) Fil-Estate Management, Inc. 2.34838% 32,692 42,978 19,474 La Paz Housing and Dev. Corp. 15.90850% 221,464 291,145 131,919 Greenfield Dev. Corporation 8.54105% 118,901 156,312 70,825 Carmona Realty Dev. Corp. 8.44849% 117,612 154,618 70,058 Grandview Realty Corporation 9.58561% 133,442 175,429 79,487 Southern Heights Land Dev. Corporation 38.90241% 541,564 711,963 322,592 South Coast Realty Corp. 10.05440% 139,968 184,008 83,375 Fil-Estate Golf and Dev. Inc. 2.32696% 32,394 42,586 19,296 Boston Bank ITF CAP (now Bank of Commerce) trustee for College Assurance Plan of the Phils., Inc. Trust Fund 3.88420% 54.072 71,086 32,209 100.00000% 1,392,110 1,830,125 829.234 ========= ======= ======= ====== that having determined their respective landholdings in the golf course based on their respective Participating Interests, the landowners agreed to contribute these lands allocated to them in exchange for shares of Manila Southwoods Golf and Country Club Inc. ("Southwoods"), a non-profit, stock corporation with an authorized capital stock of Three Thousand (3,000) shares, of which One Thousand (1,000) shares have been subscribed; that these One Thousand shares are held in trust by various individuals for and in behalf of the beneficial owner, Fil-Estate Golf and Development, Inc. ("FEGDI"): that the schedule showing the land areas in the golf course allocated to the landowners pursuant to their respective Participating Interests and the number of Southwoods shares to be received in exchange therefor is as follows: Allocated Area Landowner Golf Course Golf Shares (Sq. m.) Fil-Estate Management, Inc. 32,692 32 La Paz Housing and Development Corporation 221,464 215 Greenfield Development Corporation 118,901 115 Carmona Realty Development Corporation 117,612 114 Grandview Realty Corporation 133,442 129 Southern Heights Land Development Corporation 541,564 525 South Coast Realty Corporation 139,968 136 Fil-Estate Golf and Development, Inc. 32,394 32 Boston Bank ITF CAP (now: Bank of Commerce), Trustee for College Assurance Plan of the Philippines, Inc. Trust Fund 54,072 52 1,392,110 1,350 ======= ==== that the capital structure of Southwoods before the exchange and after the exchange showing FEGDI's control of Southwoods Heights Land Development Corporation is as follows: CAPITAL STRUCTURE BEFORE THE EXCHANGE Percentage to Stockholder No. of Shares Total Shares Fil-Estate Golf and 1,000 100% Development, Inc. (which includes 11 Founder's shares entitled to vote) CAPITAL STRUCTURE AFTER THE EXCHANGE Percentage to Stockholder No. of Shares Total Shares Fil-Estate Golf and 1,032 43.9% Development, Inc. (which includes 11 Founder's shares entitled to vote) Fil-Estate Management, Inc. 32 1.4% La Paz Housing and Development Corporation 215 9.1% Greenfield Development Corporation 115 4.9% Carmona Realty Development Corporation 114 4.9% Grandview Realty Corporation 129 5.5% Southern heights Land Development Corporation 525 22.3% South Coast Realty Corporation 136 5.8% Boston Bank ITF CAP (now Bank of Commerce), trustee for College Assurance Plan of the Philippines, Inc. Trust Fund 52 2.2% 2,350 100.00% ==== ======= that under the Articles of Incorporation of Southwoods, only Founder's shares have the right to vote for a period of five (5) years from Southwoods' start of operations; and that after the exchange, FEGDI which owns all of the founder's shares entitled to vote, together with one of the transferors, Southern Heights Land Development Corporation will own 66.2% of the total outstanding capital stock of Southwoods, with FEGDI continuing to own all of the voting stocks of Southwoods . cdta In connection therewith, you now request a ruling as to the tax consequence of the transfer by the aforementioned landowners of their landholdings in the golf course in exchange for shares of Manila Southwoods Golf and Country Club, Inc. 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 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 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 the former of their respective landholdings in the golf course allocated to each of such transferors on the basis of their respective participating interests, in exchange for shares of stock of the transferee corporation, Manila Southwoods Golf and Country Club, Inc. considering that after the exchange of properties and as a result of the exchange, not more than five of the transferors will gain control of the transferee corporation by owning at least 51% of the total voting power of all classes of stocks entitled to vote, 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 properties or of the stocks involved in the exchange, the original or historical cost of the properties or stock 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 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 34(c) (5) (a) & (b), Tax Code as amended by PD 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, 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 properties transferred, or of their interest in such properties, together with a statement of the original acquisition cost/adjusted cost basis or other basis thereof at the time of 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 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 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 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 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 transaction. 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 to be executed to effect the aforesaid transfer (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982) Finally, the certificates of stocks to be issued by Manila Southwoods Golf and Country Club, Inc. pursuant to the said exchange transaction 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 aforesaid real properties may be registered by the Register of Deeds concerned in the name of Manila Southwoods Golf and Country Club, Inc. 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