Transfer of Conjugal Property for Shares of Stock Exempt from Payment of Capital Gains Tax

May 18, 1993 BIR RULING NO. 225-93 TRANSFER OF CONJUGAL PROPERTY FOR SHARES OF STOCK EXEMPT FROM PAYMENT OF CAPITAL GAINS TAX 34 (c) (2) (C) 43-93 225-93 Mrs. Sergia L. Ungab (Attorney-in-fact) # 44-D M.A. Reyes St. Little Baguio, San Juan Metro Manila This refers to your letter dated January 28, 1993 requesting in effect, for a confirmation of your opinion that the transfer of conjugal property by spouses Manuel and Julia Bernardo in favor of J. Bernardo Co., Inc., 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. It is represented that J. Bernardo Co., Inc. is a domestic corporation duly registered with the Securities and Exchange Commission (SEC), with an authorized capital stock of P1,600,000.00, divided into 16,000 shares with a par value of P100.00 per share, of which 4,000 shares were subscribed as follows: cdta Stockholder No. of Shares Amount Subscribed Manuel L. Bernardo 1,840 P184,000.00 Julia B. Bernardo 1,840 184,000.00 Patricio B. Bernardo 80 8,000.00 Shirley B. Sandoval 80 8,000.00 Dionisio B. Bernardo 80 8,000.00 Mary Angeline B. Rosario 80 8,000.00 Total 4,000 P400,000.00 ======== ========= that spouses Manuel and Julia Bernardo are the absolute and registered owners of a condominium unit identified and described as unit No. IX-S, Building No. IX, Park Avenue Townhouses, Quirino District, Quezon City, covered by Condominium Certificate of Title No. 1913, issued by the Registry of Deeds of Quezon City; that on January 28, 1993, spouses Manuel and Julia Bernardo executed a Deed of Assignment of their abovementioned condominium property in favor of J. Bernardo Co., Inc., in exchange for additional 1,000 shares of stock (500 shares for each spouse) in the total amount of P100,000.00; that as a result of the above transaction, the spouses gained control of the corporation by owning 93.6% of the total voting stock of the said corporation, as follows: Stockholder No. of Shares Amount Subscribed Manuel L. Bernardo 2,340 P234,000.00 Julia B. Bernardo 2,340 234,000.00 Patricio B. Bernardo 80 8,000.00 Shirley B. Sandoval 80 8,000.00 Dionisio B. Bernardo 80 8,000.00 Mary Angeline B. Rosario 80 8,000.00 Total 5,000 P500,000.00 ==== ========= that in support of your request, you submitted to this Office photocopies of the following documents: (a) deed of assignment; (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 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 transferor and the transferee corporation on the transfer by the spouses Manuel and Julia Bernardo of their conjugal property in favor of J. Bernardo Co., Inc., in exchange for its shares of stock, considering that as a consequence of the exchange, the said spouses 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 property or of the stocks involved in the exchange, the original or historical cost of property 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 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 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 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 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 immediate 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/property 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 by J. Bernardo Co., Inc. 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 Register of Deeds concerned in the name of the transferee corporation, J. Bernardo Co., 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, then this ruling shall be considered null and void. cdtech VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue