Tax Consequence of the Transfer of Real Properties

November 14, 1989 BIR RULING NO. 227-89 34 (c) (2) (c) 115-89 227-89 Gentlemen : This refers to your letter dated October 5, 1989 requesting a ruling on the tax consequence of the transfer of Mrs. Florida J. Tumbocon of her real properties in your favor in exchange for your shares of stock. It is represented that as shown in your Articles of Incorporation, your authorized capital stock is P3,000,000.00 divided into 30,000 shares at par value of P100.00 per share; that out of said authorized capital stock, the amount actually subscribed is P750,000.00 distributed as follows: cdi No. of Amount Amount Name Shares Subscribed Paid Florinda Tumbocon 1,952 P194,200.00 P48,800.00 Lolito Tumbocon 1,948 194,800.00 48,700.00 Emilio Lolito Tumbocon 600 60,000.00 15,000.00 Ma. Teresa Tumbocon 600 60,000.00 15,000.00 Ma. Linda Tumbocon 600 60,000.00 15,000.00 Prima Liza Tumbocon 600 60,000.00 15,000.00 Mary Eileen Tumbocon 600 60,000.00 15,000.00 Joseph Anthony Tumbocon 600 60,000.00 15,000.00 that should the Deed of Assignment executed between you and Mrs. Florinda J. Tumbocon is implemented your resulting ownership will be as follows: No. of Amount Amount Name Shares Subscribed Paid Florinda Tumbocon 19,203 P1,920,300.00 P 1,920,300.00 Lolito Tumbocon 1,948 194,800.00 48,700.00 Emilio Lolito Tumbocon 600 60,000.00 15,000.00 Ma. Teresa Tumbocon 600 60,000.00 15,000.00 Ma. Linda Tumbocon 600 60,000.00 15,000.00 Prima Liza Tumbocon 600 60,000.00 15,000.00 Mary Eileen Tumbocon 600 60,000.00 15,000.00 Joseph Anthony Tumbocon 600 60,000.00 15,000.00 24,751 P2,475,100.00 P2,059,000.00 ====== =========== =========== and that as a result of the implementation of the aforesaid Deed of Assignment Mrs. Florinda J. Tumbocon will be your controlling owner. 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 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 stock received, i.e., 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 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 Mrs. Florinda Tumbocon of her properties in exchange for shares of stock of the corporation considering that after the exchange and as a result of the exchange she will gain further control of the transferee corporation, TJ Development, Inc. 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 stocks involved in the exchange, the original or historical cost of the properties or the stock is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by her in the exchange, she will be subject to income tax on the gains derived from such sales 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 transferor 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 transferor. [Section 34(c)(5)(a) and (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 34(c)(2)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned: (a) The transferor must file with her 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 her 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 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, you as the transferee corporation must file with your income tax return for the taxable year in which the exchange was consummated the following: 1. A complete description of the 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. 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 executed for the purpose of said exchange. (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982) 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 stamp tax 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 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 TJ Development, 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 aforesaid real properties may be registered by the Register of Deeds concerned in the name of TJ Development, Inc.. Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner