Tax Consequence of Transfer of Real Properties as Payment for the Issuance of Shares of Stocks

October 30, 1987 BIR RULING NO. 331-87 35 (c) (2) (c) 133-87 331-87 Gentlemen : This refers to your letter dated May 18, 1987 requesting for confirmation from this Office concerning the tax free nature of exchange of real property for shares of stock under Sec. 35(c) 2(c) of the Tax Code, as amended. It is represented that the transfer of real property for shares of stock shall be made in favor of Saint Anthony School of Bian, Inc., a stock corporation engaged as an institution of learning, for corporate interest; that the real property consisting of five thousand square meters (5,000 sq. meters) and covered by Transfer Certificate of Title No. T-94706, of the Register of Deeds of Laguna, Calamba Branch Office, Calamba, Laguna, is owned in common by six registered stockholders of the corporation namely: Jesusita G. Concepcion, Pructuosa G. Concepcion, Felicisima G. Concepcion, Jose G. Concepcion, Proceso G. Concepcion and Felimon G. Concepcion, that the property shall be valued at market price for purposes of the exchange; that all co-owners will transfer their respective property interests pro-indiviso at market value in the amount of P37,500.00 or 3,750 shares at par value of P10.00 per share for each co-owner; that before the exchange of property, five (5) stockholders owned the combined 80% of the voting shares, or 8,000 shares out of the 10,000 outstanding voting shares, that the two remaining stockholders, of which one is not a co-owner of the property to be transferred, own a combined minority holding constituting 20% of the outstanding voting stocks or the equivalent of 2,000 shares; that after the receipt of 3,750 shares by each of the co-owners representing the value of their property interest transferred in favor of the corporation, the five stockholders shall own a total of 26,750 shares or 5,350 shares each constituting 82.31% of the total voting stocks outstanding of 32,500 shares that is 10,000 original shares plus 22,500 shares for the property to be received in exchange; and that the two minority stockholders will own a total of 5,750 voting shares constituting 17.69% of the entire outstanding voting stocks. In reply, I have the honor to inform you that pursuant to Section 35, 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 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stock received i.e, subscribed and paid-up, whether for property or services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stock 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 transferee corporation on the transfer by your clients Messrs. Jose G. Concepcion, Proceso G. Concepcion, Felimon G. Concepcion and Mesdames Jesusita G. Concepcion, Pructuosa G. Concepcion and Felicisima G. Concepcion of their real properties as payment for the issuance of shares of stocks of Saint Anthony School of Bian, Inc. considering that after the exchange of properties and as a result of said exchange, five of the transferors will gain further control of said corporation. It should be emphasized, however, that Section 35(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 properties or of the stocks involved in the exchange, the original or historical cost of the properties or the stocks is considered. Thus, if the transferors later sell or exchange the shares of stock acquired by them in 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 of stock 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 (c)(5)(a) and (b), 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 35(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 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 or other basis thereof and the adjusted cost basis at the time of the transfer; 2. The kind of stock received and preference 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 basis thereof at the time of the transfer; and 3. Information with respect to the capital stock of that 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 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. Moreover, pursuant to Section 245 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 aforesaid deed. (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982) On the other hand, pursuant to Section 189 of the Tax Code as amended, the Certificate of Stock covering the original issue of said stock shall likewise be subject to documentary stamp tax of fifty centavos on each two hundred pesos or fractional part thereof, of the par value of such certificate of stock. After payment of the corresponding documentary stamp tax, the aforementioned real property may now be registered by the Register of Deeds concerned in the name of St. Anthony School of Bian, Incorporated. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner