Tax Consequence of the Transfer of Real Properties

December 22, 1989 BIR RULING NO. 267-89 34 (c) (2) (c) 524-88 267-89 Gentlemen : This refers to your letter dated October 25, 1989 requesting a ruling confirming your opinion that the transfer of the 11,257 sq. m. of land bounded on the northeast by Gen. Romulo Ave., on the northwest Gen. Roxas Ave., and on the southwest by the New Frontier Theater Bldg., in Cubao, Quezon City, owned by Progressive Development Corporation (PDC), to a new corporation, Manhattan Towers Development Corporation (Manhattan) solely in exchange for Manhattan stock will result neither in a taxable gain nor gift to PDC. cdta It is represented that the purpose of transferring the said land is to undertake a huge real estate development project consisting of a commercial apartment complex with three towers of eighteen stories with an aggregate area of 112,428 sq. m., the first five levels (2nd basement up to the 3rd floors) will be for commercial use and the fourth and fifth floors will be for parking, from the six floor upwards will be apartment towers consisting of three-bedroom and two-bedroom units; that this development is one of the first projects to be undertaken in redeveloping the Araneta Center and transferring it into a "City within a City" as envisioned in the master plan; that the towers will be the tallest and most modern mixed-used complex in Quezon City; that the estimated construction period is two-years; that the total project cost is about P724 million of which P172 million is allocated for the land and P552 million is allocated for the building and parking areas; that this gigantic enterprise cannot be undertaken alone by a single person so that it requires PDC to invite some local or foreign companies or financial institution as partners in the venture; that the plan is PDC will put in the land some cash distributions as its subscription to Manhattan and the other partners, which in no case will exceed four, will contribute the remaining cash to enable the project to proceed; and that Manhattan will be 60% Filipino owned; i.e., by PDC, because of constitutional limitations on alien land ownership. In reply, 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 52% (sic) of the total voting power of all classes of stock entitled to vote. Control is determined by the amount of stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a minimum (sic) of five. Accordingly, your opinion to the effect that no gain or loss shall be recognized both to the transferor corporation and the transferee corporation on the proposed transfer of Progressive Development Corporation (PDC) of its 11,257 sq.m. of land bounded on the northeast of Gen. Romulo Ave., on the northwest by Gen. Roxas Ave., and on the southwest by the New Frontier Theater Bldg. in Cubao, Quezon City, solely in exchange for shares of stock of the transferee corporation, considering that after the proposed exchange of properties and as a result of said exchange, PDC will gain control of the transferee corporation, Manhattan Towers Development Corporation, a new corporation, nor in a taxable gift to PDC, is hereby confirmed. 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 property or of the stocks involved in the exchange, the original or historical cost of the property or the stocks in considered. Thus, if the transferor later sells of exchanges the shares of stock acquired by it in the proposed exchange, it will 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 property exchanged therefor; and that the cost basis to the transferor of the property exchanged for stocks shall be the same as it would be in the hands of the transferor. [Section 3(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 proposed 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 Corporation must file with its 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 its 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 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 the property received from the transferor; 2. A statement of the original acquisition cost or other basis of the property 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 class of stocks 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 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/property received in the 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 documentary stamp tax based on the consideration or value received or contracted to be paid for such realty. A stock in a corporation is valuable consideration for the transfer of real property. (Section 177, Documentary Stamp Tax Regulations) Accordingly, if a parcel of land is exchanged with stocks in a corporation, as contemplated in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the deed to be executed to effectuate the aforementioned proposed exchange (BIR Ruling No. 245-00-000-109-82 dated April 6, 1982) Furthermore, under Section 248(d) in relation to Section 173 of the Tax Code, as amended, in case of failure to affix the proper documentary stamp tax 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 25% of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the Tax Code, as amended. Finally, the certificates of stocks to be issued by Manhattan Towers Development Corporation, are, in all probability, original issue, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. Should the proposed exchange materialize, after payment of the corresponding documentary stamp tax, the aforesaid real property may be registered by the Register of Deeds concerned in the name of Manhattan Towers Development Corporation. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner