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

June 17, 1993 BIR RULING NO. 251-93 TRANSFER OF LANDS FOR STOCKS GIVES RISE TO NEITHER GAIN NOR LOSS 34 (c) (2) (c) 221-93 251-93 San Jose, Santos, Cabrillas Borja & De Ungria Law Offices 4/F. Jacinto House 116 Rada St., Legaspi Village Makati, Metro Manila Attention: Atty . Pompeyo R . J . Cabrillas This refers to your letter dated May 12, 1993 requesting confirmation of your opinion that the transfer of properties by your client, Forward Properties, Inc., in favor of JS Steel Corporation in exchange for its shares of stock in accordance with Revenue Memorandum Order No. 26-92, falls under Section 34 (c)(2) of the Tax Code, as amended. cdtech It is represented that JS Steel Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of P130,000,000.00 divided into 1,300,000 shares with a par value of P100.00 per share, of which 650,000 shares were subscribed as follows: Name No. of Shares Amount Subscribed Jose Ma. P. Jacinto 1 P100.00 Fernando P. Jacinto, Jr. 1 100.00 Alberto M. Albano 1 100.00 Forward Properties, Inc. 389,997 38,999,700.00 Takeshi Otsubo 1 100.00 Aisuke Ido 1 100.00 Sumitomo Corporation (TOKYO) 259,998 25,999,800.00 Total 650,000 65,000,000.00 ====== ========== that Forward Properties, Inc. is the absolute and registered owner of three (3) parcels of land and the improvements thereon, with the total area of 10,700 square meters, located at Km. 21 Quirino Highway, Novaliches, Quezon City, and covered by Transfer Certificate of Title Nos. 85628, 85627 and 85626 issued by the Registry of Deeds of Quezon City; that Forward Properties, Inc. executed a Deed of Exchange of the abovementioned properties in favor of JS Steel Corporation as full payment of its above unpaid subscriptions in the total amount of P16,050,000.00 which remains its standing balance after it has made prior cash payments to its above subscriptions; that as a result of the above transaction, Forward Properties, Inc. gained control of the corporation by owning 60% of the subscribed capital stock of the said corporation as follows: Name Amount Subscribed Amount Paid Jose Ma. P. Jacinto P100.00 P100.00 Fernando P. Jacinto, Jr. 100.00 100.00 Alberto M. Albano 100.00 100.00 Forward Properties, Inc. 38,999,700.00 38,999,700.00 Takeshi Otsubo 100.00 100.00 Aisuke Ido 100.00 100.00 Sumitomo Corporation (TOKYO) 23,999,800.00 23,999,800.00 Total P65,000,000.00 P65,000,000.00 =========== =========== 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 the transferor and transferee corporations; (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 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, your opinion that no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by Forward Properties, Inc. of its properties, together with the improvements thereon in exchange for shares of stock of the transferee corporation, JS Steel Corporation, considering that as a consequence of the exchange, the transferor 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 transferor later sells or exchanges the shares of stock acquired by it in the exchange, it 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 transfer 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 transferor [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 properties 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 its 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 all the properties transferred, or of its 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 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 the properties received from the transferor; 2. A statement of the original acquisition cost or other basis of the properties 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 the 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/properties received in the exchange. The parties should 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, 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 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 stocks. Finally, the certificates of stock to be issued by JS Steel 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, JS Steel 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. aisadc LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue