Swap of Land for Stocks Does Not Give Rise to Gain or Loss

May 27, 1993 BIR RULING NO. 232-93 SWAP OF LAND FOR STOCKS DOES NOT GIVE RISE TO GAIN OR LOSS 34 (c) (2) (C) 030-90 93 Fua & Associates Danarra Condominium, Unit 209 Cor. Metropolitan Ave. & Mola Streets Makati, Metro Manila Attention: Mr . Senen B . Fua This refers to your letter dated January 25, 1990 stating that CER Realty Management, Inc. is a domestic corporation organized under the laws of the Philippines; that the said corporation has an authorized capital stock of P250,000.00, divided into 25,000 shares with a par value of P10.00 per share; that the amount of said capital stock which has been actually subscribed is P71,120.00; that by virtue of a Deed of Assignment executed on August 24, 1989, Mrs. Rosalina Ramos-Magno conveyed to the corporation, a parcel of land situated at Teoville Subd., San Dionisio, Paraaque, M.M., covered by Certificate of Title No. 6633, with an assessed value of P69,120.00 as shown from the real estate declaration and treasurer's certificate duly approved and registered by the Securities and Exchange Commission on October 10, 1989 under Reg. No. 169366, in exchange for 6,900 shares worth P69,000.00; and that after the exchange and as a result of the exchange, Mrs. Rosalina Ramos-Magno gained control of CER Realty Management, Inc. by owning more than 51% of the total subscribed stock of said transferee corporation. Based on the foregoing representation and documentary evidence submitted, you now, in effect, request for a ruling as to whether or not the aforementioned assignment is subject to the capital gains tax. 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 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 stocks in such 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., 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 (5). Accordingly, no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer of Mrs. Rosalina Ramos-Magno of her property in exchange for shares of stock of the corporation, considering that after the exchange and as a result of the exchange she will gain control of the transferee corporation, CER Realty Management, 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 of the stocks involved in the exchange, the original or historical cost of the property or the stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired in the exchange, she will 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 transferor 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 transferor [Section 34(c) (5) (a) and (b), Tax Code, as amended by P.D. 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 property transferred, or of her 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 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 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 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/property received in the exchange. The parties shall also cause to be annotated on the Transfer Certificate of Title, if any, 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 of 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 and/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 properties (Section 177, Documentary Stamp Tax Regulations). Accordingly, if a parcel of land, including improvements thereon, are 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 said transfer (BIR Ruling No. 245-00-000-00-109-82, dated April 06, 1982). Said value of the stocks shall be its fair market value which shall not be less than the par value. 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 the 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 stock to be issued by the transferee 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 the payment of the corresponding documentary stamp tax, the aforesaid real property may be registered by the Register of Deeds concerned in the name of CER Realty Management, 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 and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue