Transfer of Properties for Stocks - Tax-Free Exchange

July 20, 1993 BIR RULING NO. 327-93 TRANSFER OF PROPERTIES FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) (c) 36-93 27-93 Leynes & Bravante Law Offices T-11 Sunvar Plaza Pasay Road, Makati Metro Manila Attention: Atty . Jose C . Leynes This refers to your letter dated March 22, 1993 requesting in effect, for a confirmation of your opinion that the transfer of properties by your client, Susana Realty, Inc., in favor of the seven (7) corporations, Puppis Development, Inc., Dulce Nombre Realty, Inc., Pino Armadora Corporation, Leatherback Realty, Inc., Vicbel Inc., Subuju, Inc. & Cummer, Inc., in exchange for 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 Puppis Development, Inc., Dulce Nombre Realty, Inc., Pino Armadora Corporation; Leatherback Realty, Inc., Subuju, Inc. & Cummer, Inc. are all domestic corporations duly registered with the Securities and Exchange Commission with an authorized capital stock of TWO MILLION PESOS (P2,000,000) each, divided into 20,000 shares with a par value of P100.00 per share; that the incorporators of the aforesaid corporations and their respective stockholdings are as follows: cdtech Name No. of Shares Amt. Subscribed Puppis, Development, Inc. Susana Realty, Inc. 9,831 P983,100 Daniel Vazquez 1 100 Ma. Luisa M. Vasquez 1 100 Juan Miguel M. Vazquez 1 100 Isabel M. Vazquez 1 100 Aida Eusebio Ambrosio 1 100 Total 9,836 P983,600 ==== ======= Name No. of Shares Amt. Subscribed Dulce Nombre Realty, Inc. Susana Realty, Inc. 11,607 P1,160,700 Macaria M. de Leon 1 100 Juan Miguel M. Vazquez 1 100 Cesar L. Villanueva 1 100 Jose C. Leynes 1 100 Elsie C. Vargas 1 100 Total 11,612 P1,161,200 ===== ======== Name No. of Shares Amt. Subscribed Pino Armadora Corporation Susana Realty, Inc. 11,607 P1,160,700 Antonio P. Madrigal 1 100 Amanda A.S. Madrigal 1 100 Susana A.S. Madrigal 1 100 Ma. Ana A.S. Madrigal 1 100 Rosa A.S. Madrigal 1 100 Total 11,612 P1,161,200 ===== ======== Name No. of Shares Amt. Subscribed Leatherback Realty, Inc. Susana Realty, Inc. 11,607 P1,160,700 Ma. Paz M. Gonzalez 1 100 Gizela G. Montinola 1 100 Vicente M. Warns 1 100 Jose E. Suarez 1 100 Benjamin C. Salamat 1 100 Total 11,612 P1,161,200 ===== ======== Name No. of Shares Amt. Subscribed Vicbel, Inc. Susana Realty, Inc. 11,607 P1,160,700 Jose P. Madrigal 1 100 Victoria A.S. Madrigal 1 100 Vicente A.S. Madrigal 1 100 Gerardo A.S. Madrigal 1 100 Susana A.S. Madrigal 1 100 Total 11,612 P1,161,200 ===== ======== Name No. of Shares Amt. Subscribed Subuju, Inc. Susana Realty, Inc. 12,116 P1,211,600 Susana B. Ortigas 1 100 Francisco M. Bayot, Jr. 1 100 Vicente M. Bayot 1 100 Francisco Ortigas III 1 100 Flovie D. Eurolfan 1 100 Total 12,121 P1,212,100 ===== ======== Name No. of Shares Amt. Subscribed Cummer, Inc. Susana Realty, Inc. 10,357 P1,035,700 Consuelo P. Madrigal 1 100 Manuel Collantes 1 100 Purificacion Collantes 1 100 Susana A.S. Madrigal 1 100 Encarnacion C. Ocampo 1 100 Total 10,362 P1,036,200 ===== ======== that Susana Realty, Inc., a domestic corporation with business address at 6th Floor, Madrigal Building, Escolta, Manila, owns certain parcels of land situated in Cebu City, and covered by Transfer Certificates of Title Nos. 41178, 47679, 47680, 129,47678, 99,47677, and 41175 issued by the Register of Deeds of Cebu City; that these parcels of land with a total area of 20,218 square meters were consolidated under PCS-07-002422 and PCS 07-002423 and subsequently subdivided into 30 lots, shown as follows: Transferee Corporation PCS No. Lot No. Area(Sq.M.) Puppis Development, Inc. 07-002423 1 1,050 07-002423 14 893 07-002422 1 302 07-002422 8 302 Dulce Nombre Realty, Inc. 07-002423 2 1,260 07-002423 13 1,117 07-002422 2 300 07-002422 9 300 Pino Armadora Corporation 07-002423 3 1,260 07-002423 12 1,117 07-002422 3 300 07-002422 10 300 Leatherback Realty, Inc. 07-002423 4 1,260 07-002423 11 1,117 07-002422 4 300 07-002422 11 300 Vicbel, Inc. 07-002423 5 1,260 07-002423 10 1,117 07-002422 5 300 07-002422 12 300 Subuju, Inc. 07-002423 6 1,260 07-002423 9 1,273 07-002422 7 277 07-002422 14 278 Cummer, Inc. 07-002423 7 1,259 07-002423 15 815 07-002422 6 300 07-002422 13 300 that as a result of the above transaction, Susana Realty, Inc. gained control of each of the seven (7) transferee corporations by owning at least 51% of the total voting stock of the said corporations, as shown above; that in support of your request, you submitted to this Office photocopies of the following documents: (a) deeds of assignment; (b) articles of incorporation duly registered with the SEC of the transferee and transferor corporations; (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 properties 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 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 corporations on the transfer by Susana Realty, Inc. of its properties inclusive of the improvements thereon in exchange for shares of stock of the transferee corporations, Puppis Development, Inc., Dulce Nombre Realty, Inc., Pino Armadora Corporation, Leatherback Realty, Inc., Vicbel, Inc., Subuju, Inc. and Cummer, Inc., considering that as a consequence of the exchange, the transferor gained control of each of the transferee corporations, 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 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 exchanged for stock 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 its 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 corporations must file with their income tax returns for the taxable year in which the exchange was consummated the following: 1. A complete description of all properties received from the transferor; 2. A statement of the original acquisition cost or other basis of the properties 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 stock 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 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 the 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 certificates of stock to be issued by Puppis Development, Inc., Dulce Nombre Realty, Inc., Pino Armadora Corporation, Leatherback Realty, Inc., Vicbel, Inc., Subuju, Inc., and Cummer, 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 corporations, Puppis Development, Inc., Dulce Nombre Realty, Inc., Pino Armadora Corporation, Leatherback Realty, Inc., Vicbel, Inc., Subuju, Inc., and Cummer, 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. cdi LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue