Tax Consequence of the Transfer of the Real Property

November 6, 1981 BIR RULING NO. 218-81 035-c 2-c 10-81 218-81 Florenz D. Regalado & Associates 6th Floor, Albecer Bldg. 701 Rizal Ave., Metro Manila Attention: Mr . Jesus R . Cornago Gentlemen : This refers to your letters dated August 10, and 13, 1981 requesting a ruling on the tax consequence of the transfer of the real property of Mr. Jorge B. Aquino in payment of his unpaid subscription and in exchange for shares of the unissued capital stock of the Kyodo Printing Co., Inc. cdta It is represented that Mr. Jorge B. Aquino owned 34.52% of the capital stock of the aforesaid corporation; that on June 2, 1980 Mr. Aquino executed a Deed of Assignment covering his property located in Quezon City which has a fair market value of P2,243,520.00 in favor of the corporation in payment of the balance of his subscription of P500,000.00 and in exchange for 150,000 shares of the unissued capital stock of the corporation worth P1,500,000.00; and that after the exchange Mr. Aquino will gain control of the corporation by owning 51.98% of the total capital stock of the corporation. 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 fifty-one (51%) per cent of the total voting power of all classes of stocks entitled to vote. 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. Accordingly, no gain or loss shall be recognized both to the transferor and the transferee corporation, on the transfer of the property of Mr. Aquino in payment of the balance of his subscription and in exchange for shares of the unissued capital stock of the corporation, considering that as a result of the said exchange, Mr. Aquino will gain control of the transferee corporation by owning 51.98% of the total capital stock of the 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 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 the transferors. (Section 35(c)(5) of the Tax Code). In this connection, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gain provided for in Section 35(c) (2)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned. (a) The transferor must file with his 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 property transferred, or of his interest in such property, 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 property received from the transferor; (2) A statement of the original acquisition cost or other basis of the property 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 stock and number of shares issued to the transferor in the exchange; and acd (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 and other property received from the exchange. aisadc Very truly yours, RUBEN B. ANCHETA Acting Commissioner