Tax Consequence of the Transfer of Parcels of Land in Exchange for Shares of Stock

October 22, 1992 BIR RULING NO. 293-92 34 (c) (2) (c) 251-91 293-92 Rexfran Properties, Inc. 57 Gen. Lim, Heroes Hill Quezon City, Metro Manila Attention: Ma . Cynthia F . Resurreccion Corporate Secretary Gentlemen : This refers to your letter dated July 26, 1992 requesting confirmation of your opinion that the transfer of two parcels of land by spouses Fausto and Virginia Resurreccion to your company, Rexfran Properties Inc., in exchange of the latter's shares of stock in accordance with Revenue Memorandum Order No. 26-92, falls under Section 34(c)(2)(c) of the Tax Code, as amended. cdta It appears that Spouses Fausto and Virginia Resurreccion are the registered owners of the two (2) parcels of land together with the improvements thereon located at 57 Gen. Lim Sy., Heroes Hill, Quezon City covered by TCT No. RT-61266 and at 73 Maginoo St., Diliman, Quezon City, covered by TCT No. RT-2810; that on June 24, 1992, the said spouses formed a corporation; Rexfran Properties, Inc., capitalized at P5,000,000.00 and divided into 50,000 shares with a par value of P100.00 per share; that the spouses/incorporators each subscribed to P2,490,000.00 or a total of P4,980,000.00 and each paid the amount of P902,855.00 on their respective subscriptions or a total of P1,805,710.00 utilizing the above-described properties as payment in exchange for 9,000 shares of stock for each or a total of 18,000 shares of stock for both, as evidence by the deed of assignment executed by the spouses in favor with the corporation dated June 24, 1992; that the Securities and Exchange Commission acting on the deed of assignment, articles of incorporation and by-laws filed with it, granted Rexfran Properties, Inc. its certificate of incorporation dated July 6, 1992, showing that the spouses owned ninety-nine (99%) percent of the corporation; that in support of your request, you submitted to this Office photocopies of the following documents: (a) deed of assignment; (b) articles of incorporation duly registered with the SEC of the transferee corporation; (c) copies of the corresponding tax declaration; (e) certification as to the original historical cost of acquisition/adjusted cost basis of the properties transferred; (f) certification by the corporate secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stock; and (g) certification of percentage of ownership of the shares of stock by the transferor as a result of the transaction. 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 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., 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 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 transferors and the transferee corporation on the transfer by the spouses Fausto and Virginia Resurreccion of their parcels of land together with the improvements thereon in exchange for shares of stock of the transferee corporation, Rexfran Properties Inc., considering that as a consequence of the exchange, the transferors 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 for the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if the transferor later sales or exchanges the shares of stock of 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 transferor of the properties exchanged therefor; and that the cost basis to the transferee of the properties exchange for stocks shall be the same as it would be in the hands of the transferor. (Section 34(c)(5) and (b) of the Tax Code, as amended by Presidential Decree No. 1773). cdti 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 transaction was consummated, a complete statement of all facts pertinent to the exchange, including: 1. A description of the properties transferred, or of their 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 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. The total issued and outstanding capital stock immediately prior to and immediately after the exchange with a complete description of each class of stock; 2. The classes of stocks and number of shares issued to the transferors in the exchange; and 3. The fair market value as of the date of the 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. The parties shall also cause to be annotated on the Transfer Certificate of Titles and at the back of the Certificate of Stocks, 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, 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 later is the consideration, the value of which shall be the basis of the documentary stamp tax on the Deed of Assignment executed affect the aforesaid transfer (BIR Ruling No. 245-00-000-00-109-82 dated April 06, 1992). The value shall be the fair market value which shall not be less than the par value of the stocks. Finally, the certificate of stocks to be issued by Rexfran Properties, Inc. 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, Rexfran Properties Incorporated. 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. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue