Transfer of Properties for Stocks Gives Rise to Neither Gain nor Loss

May 19, 1993 BIR RULING NO. 227-93 TRANSFER OF PROPERTIES FOR STOCKS GIVES RISE TO NEITHER GAIN NOR LOSS 34 (c) (2) (C) 141-93 227-93 Balita, Valero & Associates Suite 2-3, Quemar Building 1782 N. Garcia Street Makati, Metro Manila Attention: Atty . Victor A . L . Valero This refers to your letter dated April 22, 1993 requesting for a ruling on the tax consequence on the transfer of properties by Monsan Development Corporation, Travel Wear, Inc. and Mr. Benjamin Santos in favor of the Dasmarias Garments Corporation in exchange for its shares of stock. cdtech It is represented that Dasmarias Garments Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of P10,000,000.00 which was increased to P50,000,000.00, divided into 5,000,000 shares with a par value of P10.00 per share, duly approved by the SEC, dated August 24, 1992; that per certification issued by the Corporate Secretary dated October 15, 1991, the following are the stockholders and their respective holdings of the said corporation: Stockholder No. of Shares Amount Subscribed Benjamin S. Santos 910,591 9,105,910.00 Lorna J. Mandapat 29,118 291,180.00 Felicito C. Payumo 19,994 199,940.00 Wilfredo P. Montemayor 13,330 133,300.00 Antonio G. Cumagun 13,330 133,300.00 J. Roberto A. Montelibano 9,998 99,980.00 Pedro P. Montemayor, Jr. 2,649 26,490.00 Ligaya S. Santos 988 9,880.00 Patricia A. Santos 1 10.00 Presentacion A. Santos 1 10.00 Total 1,000,000 P10,000,000.00 ======= =========== that Monsan Development Corporation, Travel Wear, Inc. and Benjamin S. Santos are the absolute and registered owners of the following properties: MONSAN DEVELOPMENT CORPORATION; 1. Six (6) motor vehicles of the following descriptions: 1988 Nissan Sentra (Diesel) with Plate No. PKB-879; 1978 Mazda Pick-up with Plate No. UV-DCY-372; Cimmaron Jeepney with Plate No. PAK-702; 1982 Ford Fiera Diesel with Plate No. PBG-198; 1989 Mitsubishi L-300 Van with Plate No. PKC-766; and 1982 Fuso Truck with Plate No. PBH-998; 2. Five (5) condominium units at Ferros Bel-Air Towers, located at Polaris, Durban & Felipe Streets, Poblacion, Makati, Metro Manila, and covered by Condominium Certificates of Title Nos. 19200, 19201, 19202, 19203 & 19204, issued by the Registry of Deeds of Makati; and 3. Three (3) parcels of land and improvements thereon, located at Las Pias, Metro Manila with the total area of 900 square meters, and covered by Transfer Certificates of Title Nos. T-5860, T-6121 & T-13495, all issued by the Registry of Deeds of Las Pias. TRAVEL WEAR, INC. Four (4) parcels of land and improvements thereon, located at the Municipality of Las Pias, Metro Manila, with the total area of 1,200 square meters. BENJAMIN S. SANTOS A parcel of land and improvements thereon, located at the Municipality of Las Pias, Metro Manila, with an area of 300 square meters, and covered by Transfer Certificate of Title No. T-12958, issued by the Registry of Deeds of Las Pias, Metro Manila. that on February 15, 1993 Monsan Development Corporation, Travel Wear, Inc. and Mr. Benjamin S. Santos executed their respective Deeds of Exchange of their abovementioned properties in favor of Dasmarias Garments Corporation for its shares of stock, distributed as follows: Stockholder No. of Shares Amount Subscribed Monsan Development Corp. 843,640 P8,346,400.00 Travel Wear, Inc. 144,000 1,440.000.00 Benjamin S. Santos 36,000 360,000.00 Total 1,014,640 P10,146,400.00 ======= =========== that as a result of the above transaction, the abovenamed transferors gained control of the corporation by owning at least 51% of the total voting stock of the said corporation, as follows: Stockholder No. of Shares Amount Subscribed Monsan Development Corp. 843,640 P8,346,400.00 Travel Wear, Inc. 144,000 1,440,000.00 Benjamin S. Santos 946,591 9,465,910.00 Lorna J. Mandapat 29,118 291,180.00 Felicito C. Payumo 19,994 199,940.00 Wilfredo P. Montemayor 13,330 133,300.00 Antonio G. Cumagun 13,330 133,300.00 J. Roberto A. Montelibano 9,998 99,980.00 Pedro P. Montemayor, Jr. 2,649 26,490.00 Ligaya S. Santos 988 9,880.00 Patricia A. Santos 1 10.00 Presentacion A. Santos 1 10.00 Total 2,014,640 P10,000,000.00 ======== =========== 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 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, control of the said corporation. The term "control" shall mean ownership of stock in a corporation possessing at least 51% of all 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, the transfer of properties by Monsan Development Corporation, Travel Wear, Inc. & Mr. Benjamin S. Santos in favor of Dasmarias Garments Corporation in exchange for its shares of stock, considering that as a consequence of the exchange, the said transferors gained control of the transferee corporation, qualifies as a tax-free transaction pursuant to Section 34(c) (2) (c) of the Tax Code, as amended. 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 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 Stocks, 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 the Dasmarias Garments Corporation 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, Dasmarias Garments Corporation. 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. VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue