Transfer of Real Properties in Exchange for Stocks Gives Rise to Neither Gains nor Losses

June 17, 1993 BIR RULING NO. 250-93 TRANSFER OF REAL PROPERTIES IN EXCHANGE FOR STOCKS GIVES RISE TO NEITHER GAINS NOR LOSSES 34 (c) (2) (c) 141-93 250-93 Bagbaguin Realty Corporation 62 G. De Jesus Street Caloocan City Attention: Chong Meiling Corporate Secretary This refers to your letter dated March 24, 1993 requesting in effect for a confirmation of your opinion that the transfer of properties by the stockholders, Tan Tian Siong, Thelma Uy, Conchita Francisco & Sio Chu, in favor of your company, Bagbaguin Realty Corporation, in exchange for its additional shares of stock in accordance with Revenue Memorandum Order No. 26-92, falls under Section 34(c)(2)(c) of the Tax Code, as amended. cdtech It is represented that Bagbaguin Realty Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of P5,300,000.00, divided into 530,000 shares with a par value of P10.00 per share; that the stockholders of the said corporation and their respective subscriptions are as follows: No. of Shares Stockholders Subscribed Amount Subscribed David S. Joe-Kee 53,020 P530,200.00 Tan Tian Sion 50,800 508,000.00 Mario Sy 25,480 254,800.00 Thelma Uy 1,600 16,000.00 Conchita Francisco 1,600 16,000.00 Total 132,500 P1,325,000.00 ====== ========== that the following stockholders are the absolute and registered owners of the following properties: TAN TIAN SIONG: Fourteen (14) parcels of land and the improvements thereon, with an aggregate area of 1,718 square meters, located at Bagbaguin, Caloocan City, and covered by Transfer Certificates of Title Nos. T-151630, T-151631, T-151632, T-151636, T-151731, T-151733, T-151739, T-151741, 151801, 151802, 151806, 151807, 151812 & 151813, all issued by the Registry of Deeds of Caloocan City; TAN TIAN SIONG & SIO CHU: Three (3) parcels of land and the improvements thereon, with an aggregate area of 440 square meters, located at Bagbaguin, Caloocan City, and covered by Transfer Certificates of Title Nos. T-151637, T-151738, & 151740, all issued by the Registry of Deeds of Caloocan City; SIU CHU: Four (4) parcels of land and the improvements thereon, with an aggregate area of 504 square meters, located at Bagbaguin, Caloocan City, and covered by Transfer Certificates of Title Nos. T-151641, T-151747, T-151749 & T-151788, all issued by the Registry of Deeds of Caloocan City; THELMA UY, CONCHITA FRANCISCO & SIO CHU: Five (5) parcels of land and the improvements thereon with an aggregate area of 635 square meters, located at Bagbaguin, Caloocan City, and covered by Transfer Certificates of Title Nos. T-151642, T-151687, T-151748, 151791, & 151790, all issued by the Registry of Deeds of Caloocan City; THELMA UY & CONCHITA FRANCISCO: Fourteen (14) parcels of land and the improvements thereon, with an aggregate area of 1,612 square meters, located at Bagbaguin, Caloocan City, and covered by Transfer Certificates of Title Nos. T-151689, T-151690, T-151692, 228950, T-151750, T-151757, T-151758, T-151759, 228951, 228952, 151793, 28953, 228954 & 228955, all issued by the Registry of Deeds of Caloocan City; that the above-named stockholders/transferors executed a Deed of Exchange of their abovementioned properties in favor of Bagbaguin Realty Corporation in exchange for its additional shares of stock, distributed as follows: Stockholders No. of Shares Amt. Subscribed Tan Tian Siong 109,925 P1,099,250.00 Sio Chu 87,700 877,000.00 Thelma Uy 96,950 969,500.00 Conchita Francisco 96,950 969,500.00 Total 391,525 P3,915,250.00 ====== ========== that after the exchange, the resulting stockholdings of Tan Tian Siong, Sio Chu, Thelma Uy & Conchita Francisco constitute at least 51% of the total voting stock of the corporation, as follows: No. of Shares Stockholders Subscribed Amt. Subscribed David S. Joe-Kee 53,020 P530,200.00 Tan Tian Siong 160,725 67,250.00 Mario Sy 25,400 254,000.00 Thelma Uy 98,550 985,500.00 Conchita Francisco 98,550 985,500.00 Sio Chu 87,700 877,000.00 Total 524,025 P3,915,250.00 ====== ========== that in support of your request, you submitted to this Office photocopies of the following documents: (a) deed of exchange; (b) articles of incorporation duly registered with the SEC of 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 properties 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 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., 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, your opinion that no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by the aforesaid stockholders of their properties in exchange for shares of stock of the transferee corporation, Bagbaguin Realty Corporation, considering that as a consequence of the exchange, the transferors gained control of the transferee corporation, is hereby confirmed. 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 of the 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 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 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 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 the documentary stamp tax based on the consideration or value received or contracted to be paid for the 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 certificate of stocks to be issued by Bagbaguin Realty 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 properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, Bagbaguin Realty 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue