Exchange of Properties for Stocks Exempt from Income Tax Senior Citizen's Request for Tax Refund Denied

June 18, 1993 BIR RULING NO. 260-93 EXCHANGE OF PROPERTIES FOR STOCKS EXEMPT FROM INCOME TAX 34 (c) (1) 000-00 260-93 Atty. Ambrosio M. Lina 1668 Dasmarias Avenue Makati, Metro Manila This refers to your letter dated September 24, 1992 stating that G & S Transport Corporation involved in the transport business, is contemplating on transferring its head office from Manila to Mandaluyong; that the Mandaluyong property where it is contemplating to transfer its head office, is owned by its sister company, G.I.D.C., a corporation engaged in real estate business; that in exchange for the said Mandaluyong property of G.I.D.C., G & S Transport Corporation will transfer its Manila property in favor of G.I.D.C; that both properties are classified as residential/commercial in nature; that other pertinent details of the said properties are as follows: cd Item G.I.D.C. G & S Transport Corp. Property Area 2,921 sq.m. 1,259.3 sq.m. Appraisal Value P6,000/sq. m. P11,000/sq. m. Total Appraisal Value P17,526/sq. m. P17,630,000 Zonal Value P7,500/sq. m. P9,125/sq. m. Total Zonal Value P21,907,500 P11,868,903 Original Cost P2,506,860 P1,940,000 Location Mandaluyong Manila and that the exchange amount will be based on the total appraisal value which you have equated to fair market value. Based on the foregoing representations, you now in effect request for exemption from the payment of income tax on the aforesaid exchange of realties between G & S Transport Corporation and G.I.D.C. pursuant to Section 140 of Revenue Regulations No. 2 in relation to Section 34(c) of the Tax Code, and a ruling as to whether the document to be executed effecting the said exchange is subject to documentary stamp tax. In reply, please be informed that in BIR Ruling No. 250-82, dated September 29, 1982, this Office ruled that under Section 140 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations, for income to be realized in exchanges of property, it is required that the "property or interest in property received in exchange must be essentially different from the property or interest in property disposed of." This means that there must be a change in substance and not merely a change in form. Considering that the parties to an exchange of real properties will not get something fundamentally and essentially different from what they already had prior to the exchange, the parties are not subject to income tax as a result of the said transaction. However, while the provision of Section 140 of Revenue Regulations No. 2 had been copied from the U.S. Income Tax Regulations, the corresponding statutory provision which it is supposed to implement does not exist in our present Tax Laws, in which case, the aforementioned ruling was abandoned by this Office in BIR Ruling No. 125-85, dated August 12, 1985, where this Office ruled that the net capital gains realized from the sale, exchange or other disposition of real property by a citizen of the Philippines or resident alien individuals shall be subject to final income tax at the rates prescribed by then Section 34(h) [now Section 21(e)] of the Tax Code, as amended by Batas Pambansa Blg. 37, and implemented by Revenue Regulations No. 8-79 (BIR Ruling No. 228-87). On the other hand, all sales, exchanges, or transfers of real property (whether classified as ordinary or capital asset) by corporations, as in the instant case, consummated on or after January 1, 1990, are subject to the creditable expanded withholding tax imposed under Revenue Regulations No. 1-90, implementing Section 50(b) of the Tax Code, as amended. Moreover, in this exchange of realties, the creditable withholding tax base shall be the fair market value/zonal value of such realties (RMC 7-90). In other words, G & S Transport Corporation and G.I.D.C. shall each be subject to the 5% creditable withholding tax based on the fair market value/zonal value of their respective realties which shall be credited against the quarterly corporate income tax liability or final corporate income tax liability, as the case may be, for the taxable year of G & S Transport Corporation and G.I.D.C. Finally, the document to be executed for the purpose shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code based on the zonal value of the properties exchanged. cdtech LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue