Tax Consequence of Transfer of Parcels of Land

June 13, 1988 BIR RULING NO. 259-88 34 (c) (2) (c) 126-88 259-88 S i r : This refers to your letter dated April 27, 1988 requesting a ruling on the tax consequence of the transfer by you and Ms. Zenaida G. Gordon of three (3) parcels of land owned by both of you in common in favor of Gonzales Estates, Inc. It is represented that Gonzales Estates, Inc., a domestic corporation duly registered with the Securities and Exchange Commission has an authorized capital stock of P2,000,000.00 divided into 2,000 shares with a par value of P1,000.00 per share; that the amount of capital stock which has been actually subscribed is P1,600,000.00 and the following persons have subscribed for the number of shares and the amount of capital stock, viz: cdta Names No. of Shares Amount of Capital Amount Paid Subscribed Stock Subscribed on Subscription Oscar S. Gonzales, Sr. 817 P817,000.00 P817,000.00 Zenaida G. Gordon 780 780,000.00 780,000.00 Cipriano S.B. Gonzales 1 1,000.00 1,000.00 Ambrosio Gonzales 1 1,000.00 1,000.00 Ma. Assunta Gonzales 1 1,000.00 1,000.00 1,600 P1,600,000.00 P1,600,000.00 ===== =========== =========== that on June 1, 1984 a Deed of Assignment was executed by spouses Oscar S. Gonzales, Sr. and Lydia B. Gonzales and their children, Oscar B. Gonzales, Jr., Cipriano S.B. Gonzales II, Ambrosio B. Gonzales and Ma. Assunta B. Gonzales in favor of Gonzales Estates, Inc. whereby they transferred and conveyed to the corporation their real properties covered by TCT Nos. 4083 P(M); 4063 P(M) and 21175 of the Registry of Deeds of Meycauayan, Bulacan which are owned in common with Ms. Zenaida G. Gordon as their equity contribution to Gonzales Estates, Inc., a corporation then in the process of incorporation; that on December 29, 1985, the transferors executed a Deed of Partial Remission and Amendment of Assignment such that Mr. Oscar S. Gonzales, Sr. shall convey and transfer to Gonzales Estates, Inc. his one-half (1/2) undivided interest/share in the aforesaid three (3) parcels of land in exchange for 817 shares valued at P817,000; that Messrs. Cipriano S.B. Gonzales II, Ambrosio B. Gonzales and Ms. Ma. Assunta B. Gonzales had subscribed and paid for one (1) share each of the capital stock of the corporation; and that the Deed of Assignment executed on May 4, 1984 by Ms. Zenaida G. Gordon in favor of Gonzales Estates, Inc. covering her one-half (1/2) undivided interest over the aforesaid properties in exchange for 780 shares of the capital stock of Gonzales Estates, Inc. shall be deemed as part of the total assignment, although executed in a separate document which fact was confirmed and affirmed by Ms. Zenaida G. Gordon in a Deed of Confirmation dated May 25, 1988; that with the aforementioned transfer of properties to the corporation your subscription to its capital stock and that of Ms. Zenaida G. Gordon has been fully paid; and that after the exchange and as a result of the exchange, you and Ms. Zenaida G. Gordon gained control of the corporation by owing more than 51% of the total voting power of all classes of stocks entitled to vote. 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 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 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., subscribed and paid-up, whether for property or 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 transferors and the transferee corporation on the transfer by you and Ms. Zenaida G. Gordon of your real properties, in exchange for shares of stock of the transferee corporation, considering that after the exchange of properties and as a result of said exchange, you and Ms. Zenaida G. Gordon will gain control of the transferee corporation. 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 properties or the 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 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 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), 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 was consummated, a complete statement of all facts pertinent to the exchange, including: 1. A description of the property transferred, or of their 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 preference 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 transferors; 2. A statement of the original acquisition cost or other basis of the property in the hands of the transferors and the adjusted cost basis thereof at the time of the transfer and; a. The total issued and outstanding capital stock prior to and immediately after the exchange, with a complete description of each class of stocks; 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 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. cdtech 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 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 aforesaid deed. (BIR Ruling No. 245-00-000-00-102-82 dated April 6, 1982) The certificates of stocks issued by Gonzales Estates, Inc. are, in all probability, original issues, which are subject to the documentary stamp tax imposed by Section 188 of the Tax Code, as amended. 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 to a document or instrument, there shall, for every violation, be imposed, in addition to the amount of documentary stamp tax required to be paid an amount equivalent to twenty-five percent of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. After payment of the corresponding documentary stamp tax, the aforesaid real property may now be registered by the Register of Deeds concerned in the name of Gonzales Estates, Inc. cdti Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner