Swap of Property for Stocks Exempt from Capital Gains Tax

May 31, 1993 BIR RULING NO. 234-93 SWAP OF PROPERTY FOR STOCKS EXEMPT FROM CAPITAL GAINS TAX 34 (c) (2)(C) 109-93 234-93 Bautista Picazo Buyco Tan & Fider 8th Floor, Singapore Airlines Bldg. 138 H.V. de la Costa St., Salcedo Village Makati, Metro Manila Attention: Ms . Estrelita G . Gacutan This refers to your letter, dated February 1, 1993 requesting for a ruling as to whether the transfer of properties by the spouses Higino Francisco and Norberta G. Francisco to Ginory Realty Corporation (Ginory) in exchange for its shares of stock in accordance with Revenue Memorandum Order No. 26-92 falls within the purview of Section 34(c) (2) (c) of the Tax Code, as amended. It is represented that Ginory is a domestic corporation duly registered with the Securities and Exchange Commission; that Ginory has an authorized capital stock of Twenty Million Pesos (P20,000,000.00) of which P5,000,000.00 is presently subscribed as follows: cdtech No of Shares Percentage Name Subscribed Par Value of Ownership 1. Higino R. Francisco 52 P5,200 .104% 2. Norberta G. Francisco 261 26,100 .522% 3. Lucia F. Borromeo 4,517 451,700 9.034% 4. Eduardo G. Francisco 4,517 451,700 9.034% 5. Filomeno G. Francisco 4,517 451,700 9.034% 6. Ramon G. Francisco 4,517 451,700 9.034% 7. Federico G. Francisco 4,517 451,700 9.034% 8. Ma. Lourdes F. Gutierrez 4,517 451,700 9.034% 9. Benjamin G. Francisco 4,517 451,700 9.034% 10. Susana G. Francisco 4,517 451,700 9.034% 11. Ma. Regina G. Francisco 4,517 451,700 9.034% 12. Nora G. Francisco 4,517 451,700 9.034% 13. Irene G. Francisco 4,517 451,700 9.034% Total 50,000 P5,000,000 100% ====== ========= ======= that the spouses are the absolute and registered owners of the following nine (9) parcels of land, together with all the existing improvements thereon: T.C.T. No. Location Area (in sq. m.) 1. 225756 (4641) Dasmarias, Makati 1,012 2. RT-52822 Dapitan, Quezon City 1,608.61 3. 76715 Payatas, Quezon City 1,731 4. RT-22733 Quezon Avenue, Quezon City 1,513.10 5. 116390 Tibagan, Antipolo 3,762 6. 116391 Tibagan, Antipolo 1,000 7. 402552 Beverly Hills, Antipolo 911 8. (220884) 110125 Ronquillo, Sta. Cruz 236.40 9. 135169 Sampaloc, Manila 513.10/499.20 that on November 11, 1992, the spouses executed a Deed of Assignment of the aforementioned properties with an aggregate value of P9,728,690 in favor of Ginory, in exchange for 98,000 shares of Ginory with a par value of P100 per share, or an aggregate value of P9,800,000, to be issued by Ginory out of the unissued portion of its authorized capital stock; that after the exchange, and as a result of the exchange, the spouses will gain control of Ginory by owning 66.423% of the issued and outstanding shares of Ginory; and 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 SEC of the transferee corporation; c. Copies of the Transfer Certificates of Title and the corresponding tax declarations; 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, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by spouses Higino Francisco and Norberta G. Francisco of their properties, together with the improvements thereon, in favor of Ginory in exchange for its shares of stock, considering that as a result of the exchange, the transferors gained control of the corporation. 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 properties or stocks involved in the exchange, the original or historical cost of the properties or stocks 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 properties exchanged therefor; and that the cost basis to the transferee of the properties exchanged for stock 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 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. 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. The parties shall also cause to be annotated on the Transfer Certificates 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 properties or of the 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 or 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 stocks. Finally, the certificates of stock to be issued by Ginory 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 properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, Ginory. 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. aisadc VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue