Transfer of Property for Stocks - Tax-Free Exchange

July 8, 1993 BIR RULING NO. 312-93 TRANSFER OF PROPERTY FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) (c) 95-93 12-93 Crisanto L. Francisco & Associates Mezzanine Floor, Hotel Otani Manila Roxas Boulevard and T.M. Kalaw Streets Ermita, Manila Attention: Atty . Crisanto L . Francisco This refers to your letter dated May 14, 1993 requesting in effect, for a confirmation of your opinion that the transfer of the real property of Mr. Alejo A. Aquino, Jr. in favor of the Hi-Estate Realty Corporation in exchange for its 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. It is represented that the Hi-Estate Realty Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of "Two Million Pesos (P2,000,000.00), Philippine currency, consisting of Twenty Thousand shares (20,000) with a par value of One Hundred Pesos (P100.00) per share; that the incorporators of the corporation, with the corresponding number of shares subscribed and paid are as follows: casia No. of Amt. Name Shares Subscribed Amt. Paid Mariano V. Pamintuan 1,000 P100,000.00 P100,000.00 Flora S. Lacuna 1,000 100,000.00 100,000.00 Roberto S. Gonzales 1,000 100,000.00 100,000.00 Lourdes G. Alava 1,000 100,000.00 100,000.00 Rosalia S. Lee 1,000 100,000.00 100,000.00 Total 5,000 P500,000.00 P500,000.00 ==== ========= ========= that Mr. Alejo A. Aquino, Jr., married to Florinda S. Aquino is the absolute and registered owner of a residential lot located at 923 Estrada Street, Malate, Manila, covered by Transfer Certificate of Title No. 39838 issued by the Registry of Deeds of Manila; that a Deed of Exchange was executed by and between Mr. Alejo A. Aquino, Jr. and Hi-Estate Realty Corporation whereby the former assigns to the latter the abovementioned property in exchange for 15,000 shares of stock with a par value of One Hundred (P100.00) Pesos per share to the capital stock of the corporation; that as a result of the above transaction, Mr. Alejo A. Aquino, Jr. gained control of the corporation by owning at least 51% of the total voting stock of the said corporation; and that in support of your request, you submitted to this Office the following documents: (a) deed of exchange; (b) articles of incorporation duly registered with the SEC of the transferee corporation; (c) copy of the transfer certificate of title and the corresponding tax declaration; (d) certification by the corporate secretary of the transferee corporation as to the original or historical cost of acquisition/adjusted cost basis of the property transferred, authorized capitalization and the par value of the shares of stock and percentage of ownership of the shares of stock by the transferor as a result of the transaction; (e) certified copy of BIR's zonal valuation of the property involved; and (f) other pertinent document. In reply thereto, I have the honor to inform you that pursuant to Section 34(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 the 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 transferor and the transferee corporation on the transfer by Mr. Alejo A. Aquino, Jr. of his property in exchange for shares of stock of the transferee corporation, Hi-Estate Realty Corporation, considering that as a consequence of the exchange, Mr. Alejo A. Aquino, Jr. 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 of the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by him in the exchange, he 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 property exchanged therefor; and that the cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferor [Section 34(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 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 must file with his 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 property transferred, or of his interest in such property, 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 transfer. 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 classes of stocks and number of shares issued to the transferor in the exchange; and c. The fair market value as of the date of the 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/properties received in the exchange. The parties shall also cause to be annotated on the Transfer Certificate of Title and at the back of the Certificates of Stock, 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 latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the Deed of Assignment executed to effect the aforesaid transfer (BIR Ruling No. 245-00-000-00-109-82 dated April 06, 1982). 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 the Hi-Estate Realty Corporation 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 property may be registered by the Register of Deeds concerned in the name of the transferee corporation, Hi-Estate Realty Corporation. 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. cdtech LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue