Transfer of Property for Stocks - Tax-Free Exchange

July 8, 1993 BIR RULING NO. 315-93 TRANSFER OF PROPERTY FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) (c) 09-93 15-93 Romulo, Mabanta, Buenaventura Sayoc & De los Angeles Fourth Floor, King's Court 2129 Pasong Tamo Street Makati, Metro Manila Attention: Atty . Reynaldo G . Geronimo This refers to your letter dated August 27, 1992 requesting for a ruling as to whether the transfer of properties by the spouses Teodoro T. Escolin, Sr. and Yolanda P. Escolin to Press Realty Holdings, Inc. in exchange for its shares of stock in accordance with Revenue Memorandum Order No. 26-92 falls within the purview of Section 34(c)(2)(c) of the Tax Code, as amended. cdtech It is represented that Press Realty Holdings, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission; that Press Realty Holdings, Inc. has an authorized capital stock of Four Million Pesos (P4,000,000.00) divided into forty thousand (40,000) shares with a par value of one hundred pesos (P100.00) each; that the amount of the capital stock which has been actually subscribed is One Million Pesos (P1,000,000.00) and the following persons have subscribed for the number of shares and the amount of capital stock indicated opposite their respective names: Name No. of Shares Amount Teodoro T. Escolin, Sr. 4,996 P499,600 Yolanda P. Escolin 4,996 499,600 Rita P. Escolin 2 200 John P. Escolin 1 100 Teodoro P. Escolin, Jr. 1 100 Joseph P. Escolin 1 100 Anthony P. Escolin 1 100 Ramon P. Escolin 1 100 Robert P. Escolin 1 100 Total 10,000 P1,000,000 ===== ======== that the following persons have paid on the shares of stock which they have subscribed, the amount set out after their respective names: Name Amt. Paid Teodoro T. Escolin, Sr. P499,600 Yolanda P. Escolin 499,600 Rita P. Escolin 200 John P. Escolin 100 Teodoro P. Escolin, Jr. 100 Joseph P. Escolin 100 Anthony P. Escolin 100 Ramon P. Escolin 100 Robert P. Escolin 100 Total P1,000,000 ======== that the spouses are the absolute and registered owners of a parcel of land containing an area of 945 square meters, more or less, covered by TCT No. (345467) - 52929 of the Registry of Deeds for Metro Manila, District II and another parcel of land containing an area of 320 square meters, more or less, including improvements thereof covered by Transfer Certificate of Title No. 244248 of the Registry of Deeds for Metro Manila, District II; that on August 11, 1992, the spouses executed a Deed of Assignment of their aforementioned properties in favor of Press Realty Holdings, Inc. in exchange for 9,992 fully paid shares of Press Realty Holdings, Inc. with a par value of P100.00 per share or a total par value of P999,200.00; that after the exchange and as a result of the exchange, the spouses gained control of Press Realty Holdings, Inc. by owning 99.92% of the outstanding shares of stock of Press Realty Holdings, Inc; and 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 SEC of the transferee corporation; c. Copies of the Transfer Certificates of Title and the corresponding tax declarations; d. Certification as to the original or historical cost of acquisition/adjusted cost basis of the property transferred; e. Certification by the corporate secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stock; f. Certification of percentage of ownership of the shares of stock by the transferor as a result of the transaction; and g. Other pertinent documents. 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 stocks 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, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by spouses Teodoro T. Escolin, Sr. and Yolanda P. Escolin of their properties together with the improvements thereon in favor of Press Realty Holdings, Inc. in exchange for its shares of stock, considering that as a result of the exchange, the transferors gained control of the corporation. 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 transferors later sell or exchange the shares of stock acquired by them in the exchange, they 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 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) of the Tax Code, as amended by Presidential Decree No. 1773). In this connection, you are further advised that in order that the parties 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. A complete description of all properties received from the transferors. 2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferors and the adjusted cost 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 transferors in the exchange; and c. 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 Certificates 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 Press Realty Holdings, 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, Press Realty Holdings, Inc. 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. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue