BIR Ruling No. 228-12

March 29, 2012 BIR RULING NO. 228-12 RMR 01-01; Section 40 (C) (2) (6) (c) 1997 NIRC Corbro Development Corporation UM Seno & Burgos Streets, Barangay Alang-Alang Mandaue City, Cebu Attention: Atty. Licinius M. Abadiano Gentlemen : This refers to your letter dated November 17, 2009 requesting for a ruling that no gain or loss shall be recognized on the transfer by Spouses Zoilo M. Cortes, Jr. (TIN 143-406-590-000) and Editha F. Cortes (TIN 130-738-883-000 and hereinafter referred to as the Assignors) of their real properties including improvements therein to Corbro Development Corporation (Corbro) in exchange for the latter's shares of stock in accordance with Revenue Regulations (RR) No. 18-2001 and falling under Section 40 (C) (2) and (6) (C) of the Tax Code of 1997, as amended. HCTEDa Documents submitted show that Corbro is a newly incorporated domestic corporation duly registered with the Securities and Exchange Commission (SEC) with SEC Company Registration No. CS200931408 dated November 4, 2009; that Corbro has an authorized capital stock of Forty Million Pesos (P40,000,000.00) divided into Four Hundred Thousand (400,000) shares with a par value of One Hundred Pesos (P100.00) per share; that its incorporators with their corresponding shares subscribed and paid-up are as follows: No. of Amount Subscribed Amount Paid Name Shares (in Pesos) (in Pesos) Zoilo M. Cortes, Jr. 49,600 4,960,000.00 2,200,521.67 Editha F. Cortes 49,600 4,960,000.00 2,200,521.66 Kristian F. Cortes 200 20,000.00 5,000.00 Jonathan Carlo F. Cortes 200 20,000.00 5,000.00 Zoilo III F. Cortes 200 20,000.00 5,000.00 Anton F. Cortes 200 20,000.00 5,000.00 Total 100,000 10,000,000.00 4,421,043.33 ====== =========== =========== * The amount of P478.35 paid in cash each by Zoilo Jr. and Editha Cortes are not reflected in the above matrix since the property contemplated in tax-free exchanges excludes cash. (No. IV.1 of Revenue Memorandum Ruling No. 01-01 dated November 29, 2001) that the Assignors are the registered owners of the land and improvements, described as follows: Type of CCT No./TCT No./ Fair Market Value Historical Cost Property Tax Declaration (in Php) (in Php) (TD) No. Condominium Unit 27768/E-023-00618 805,600.00 0.00 Land 21747/2006-001-02975 5,406,000.00 2,500.00 Land 34975/2006-013-02208 5,107,500.00 700,000.00 Land 52256/2006-014-01736 990,000.00 362,637.00 Land 52257/2006-014-01735 375,000.00 137,363.00 Land 39155/2006-008-00122 1,641,500.00 100,000.00 Building 2006-006-00262 141,790.00 0.00 Building 2006-016-02171 1,344,460.00 0.00 Building 2006-001-02979 491,760.00 0.00 Building 2006-013-02667 868,740.00 540,640.00 Building 2006-013-02668 496,810.00 232,000.00 Total 17,669,160.00 2,075,140.00 =========== ========== that on September 23, 2009, a Deed of Assignment was executed by the Assignors in favor of Corbro, whereby the former transferred to the latter the title and ownership over their above-described properties in exchange for and as payment of their subscriptions, to wit: Name No. of Shares Subscribed Zoilo M. Cortes, Jr. 49,600 Editha F. Cortes 49,600 Total 99,200 ===== and that as a result of the above transfer, the Assignors gained control of Corbro by owning 98.21% of the total voting stocks of the said corporation. In reply thereto, please be informed that pursuant to Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended, 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 by the 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, no gain or loss shall be recognized on the transfer by Spouses Zoilo M. Cortes, Jr. and Editha F. Cortes of their properties in exchange for shares of stock of the transferee corporation, Corbro, considering that as a consequence of the exchange, they gained control of the transferee corporation by owning more than 98.21% of its total voting stocks. While it appears that TCT Nos. 52256 and 52257 are the exclusive properties of Zoilo M. Cortes, Jr., the Deed of Assignment, however, would show that the spouses equally received shares of stock in exchange for the properties transferred, and as such should be subject to donor's tax imposed under Section 98 of the Tax Code of 1997, as amended. ESCTaA Furthermore, the corresponding shares allocated to each of the properties transferred and the substituted bases thereof are as follows: Name of Type of No. of Shares Substituted Transferor/s Property Allocated Basis Zoilo M. Cortes, Jr. Condominium Unit 2,261 0.00 Land 15,175 1,250.00 Land 14,338 350,000.00 Land 2,779 181,318.50 Land 1,053 68,681.50 Land 4,608 50,000.00 Building 398 0.00 Building 3,774 0.00 Building 1,380 0.00 Building 2,439 270,320.00 Building 1,395 116,000.00 Sub-Total 49,600 1,037,570.00 Editha F. Cortes Condominium Unit 2,261 0.00 Land 15,175 1,250.00 Land 14,338 350,000.00 Land 2,779 181,318.50 Land 1,053 68,681.50 Land 4,608 50,000.00 Building 398 0.00 Building 3,774 0.00 Building 1,380 0.00 Building 2,439 270,320.00 Building 1,395 116,000.00 Sub-Total 49,600 1,037,570.00 Grand Total 99,200 2,075,140.00 ====== ========== It should be emphasized, then that Section 40 (C) (2) and (6) (c) of the Tax Code of 1997 merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the real properties or of the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if any of the Assignors/Assignee later sell or exchange, they shall be subject to income tax/capital gains tax, as the case may be, on the gains they derived from such sale or exchange, taking into consideration that the cost basis of the shares/real properties shall be the same as the original acquisition cost or adjudged cost basis to the transferee 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. [Sec. 40 (C) (5) (a) and (b) of the Tax Code of 1997] It is to be noted that under RR 10-2011 dated July 1, 2011, the exchange of goods or properties, including the real estate properties used in business or held for sale or for lease by the transferor for shares of stock, whether resulting in corporate control or not is subject to value-added tax (VAT). In the herein case, the transfer of TCT No. 34975 together with the commercial building and warehouse existing thereon, the restaurant building on Lot 246-B-2 located at A.C. Cortes and Plaridel Sts., Cambaro, Mandaue City and apartment building on Lot 431-B at Mabini St., Looc, Mandaue City by Sps. Cortes to Corbro is subject to VAT because the aforesaid properties are held by the Assignors primarily for lease in the ordinary course of business. Moreover, you are further advised that in order that the parties to the exchange transaction can avail of the non-recognition of gains provided for in Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, they should comply with the requirements hereunder: 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 property they transferred, or of their interest in such property, with a statement of the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer; 2. The kinds 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 the property received from the transferors; 2. A statement of the original acquisition cost or other basis of the property 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 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 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. DcITHE In addition to the foregoing requirements, the parties shall enclose with their respective income tax returns for the taxable year in which the tax-free exchange occurred a copy of the request for ruling filed with, and the corresponding ruling issued by the Bureau of Internal Revenue, both duly stamped received by the appropriate office of the Bureau of Internal Revenue. Such persons shall include as a note to their respective audited financial statements for the taxable year in which the exchange occurred a statement to the effect that they hold such assets/shares acquired in a tax free exchange and the year in which such exchange occurred, and in the taxable years until the subject properties are subsequently transferred to another transferee. The parties shall, pursuant to Section 58 (E) of the Tax Code of 1997, also cause the Register of Deeds to annotate on the Transfer Certificates of Title and/or the Corporate Secretary to annotate 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 properties or shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange; provided however, that any violation by the Register of Deeds of this condition shall be penalized under Section 269 of the Code. It is further required that within ninety (90) days from receipt of this ruling, the parties to the transaction must submit to the Law Division, Bureau of Internal Revenue, a certified true copy/ies by the Register of Deeds or Corporate Secretary, as the case may be, of duly annotated Transfer Certificates of Stock, in respect of the transferred properties and shares of stock of transferee corporation. The fair market value and the zonal valuation as stated above shall be subject to verification by the RDO concerned. Pursuant to Section 196 of the Tax Code of 1997, as amended, a conveyance or deed whereby land is assigned or transferred to another person is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of the same Code, whichever is higher. However, under Republic Act (RA) No. 9243 which took effect on March 20, 2004, transfer of property pursuant to Section 40 (C) (2) of the 1997 Tax Code, as amended, is now exempt from the payment of documentary stamp tax (DST) under Section 196 of the Tax Code of 1997. Accordingly, the transfer by the Assignors of their real properties to Corbro, as in this case, is not subject to DST under said section. Finally, the shares to be issued by Corbro are original issues subject to the documentary stamp tax imposed by Section 175 (now Section 174) of the Tax Code of 1997, as amended by RA No. 9243, which shall attach upon acceptance by the corporation of the stockholder's subscription regardless of the actual delivery of the certificates of stock. This Office reiterates that the conveyance by Zoilo M. Cortes, Jr. to Editha F. Cortes of his share in TCT Nos. 52256 and 52257 is subject to donor's tax pursuant to Section 98 of the Tax Code of 1997, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained 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 as null and void. HCETDS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue