Tax Consequences of Transfer of Farmers Plaza Solely in Exchange for Stocks

November 19, 1986 BIR RULING NO. 256-86 35-c-2-c 188-86 256-86 Gentlemen : This refers to your letter dated October 16, 1986 requesting a ruling on the tax consequences of the transfer by the Progressive Development Corporations (PDC) of its land and building known as the Farmers Plaza to a new corporation to be known as the New Farmers Plaza, Inc. (NFPI) solely in exchange for NFPI stocks. It is represented that Farmers Plaza situated in Araneta Center, Cubao, Quezon City was burned on June 13, 1985; that the cost for its reconstruction is estimated at P162.7 million and pre-operating and administration expenses are estimate at P18.1 million; that it has not been rebuilt due to lack of financing as (a) capital infusion from PDC stockholders is out of the question due to uncertain political and business conditions, (b) PDC's retained earnings amount to only P12 million and total liabilities amount to P273 million and (c) outside borrowing is not advantageous and expensive because of tight money conditions and high interest rates; that it is imperative to pursue the project without further delay because of (a) substantial and continuing loss of revenue caused by loss of rentals, (b) continued payment of realty taxes, and (c) esthetic and sanitary considerations and depreciation of property values of the Araneta Center, that the best step to take under the circumstances is a joint venture for the project; that to carry out the joint venture project, it is necessary to form NFPI with PDC owning 60% and its partner owning 40% because of the constitutional limitations on alien land ownership; that the Farmers Plaza assets will be transferred to NFPI in exchange for NFPI stock and partial funding for the project will be supplied by subscriptions by the partner so that NFPI will be owned and controlled by practically only two stockholders; and that after the exchange and as a result of such exchange, PDC will gain control of NFPI by owning 60% of the total capital stock of the corporation. cdta In reply thereto, I have the honor to inform you that pursuant to Section 35, paragraph (c)(2)(c) of the Tax Code as amended by Republic Act No. 4522 and Presidential Decrees 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 fifty-one (51%) per cent of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stock received, i.e., subscribed and paid-up, whether for property of for services, by the transferor or transferors in determining the 51% stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by PDC of its land and building in exchange solely for shares of stock of NFPI considering that as a result of the said exchange the transferor will gain control of the corporation. It should be emphasized, however, that section 35(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 historical cost of the properties or the 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 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 properties exchanged therefore; 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 35(c)(5)(a) & (b), 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 35(c)(2)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned. (a) The transferor must file with his 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 properties transferred, or of its interest in such properties, 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 preference if any; (3) The number of shares of such 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 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 stock 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 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. Moreover, the aforementioned transaction is not subject to the donor's tax imposed by Section 209 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 of real properties (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 aforesaid deed. (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982). cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue