Tax Consequence of the Transfer of Real Properties

July 18, 1988 BIR RULING NO. 331-88 34 (c) (2) (c) 402-87 331-88 Gentlemen : This refers to your letter dated May 31, 1988 requesting in behalf of your client, Terra Flora Realty and Development Corporation a ruling on the tax consequence of the transfer by the spouses Jose N. Dualan and Florencia Padilla-Dualan of their real properties in favor of your client; and that basis of computing the documentary stamp tax due on the Deed of Assignment executed on May 7, 1982. cdta It is represented that on December 12, 1981, your client organized Terra Flora Realty and Development Corporation with a capital stock of P5,000,000.00 divided into 50,000 shares with a par value of P100.00 per share; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up, viz: No. of Shares Capital Stock Amount Paid Name Subscribed Subscribed on Subscription Renato A. Reyes 5,650 P565,000.00 P141,250.00 Florencia D. Reyes 5,650 565,000.00 141,250.00 Angelina A. Barrera 400 40,000.00 10,000.00 Carmen L. Menendez 400 40,000.00 10,000.00 Luis O. Casas 400 400,000.00 10,000.00 12,500 P1,250,000.00 P312,500.00 ====== =========== ========== that on May 7, 1982 spouses Jose N. Dualan and Florencia Padilla-Dualan assigned and transferred real properties situated in the Municipality of Pasay and in the City of Manila covered by Transfer Certificate of Title Nos. 739, 52165, 24475, 49154 and 45606 to Terra Flora Realty and Development Corporation in payment of their subscription of 8,433 shares and to the unsubscribed portion of the capital stock consisting of 37,500 shares; that after the exchange and as a result of the exchange, the transferors gained control of the corporation by owning more than 51% of the total voting power of all classes of stocks entitled to vote; that the subject transaction and the documents covering the same were submitted and registered with the Register of Deeds having jurisdiction over the subject properties on November 16, 1982; that an assessment was made and the amount to be paid as documentary stamp tax were computed; and that it is your contention that the basis of the assessment of the documentary stamp tax to be paid for this transaction should be the computation made on the date of registration. In reply, 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 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 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 for 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 the transferee corporation on the transfer by the spouses Jose N. Dualan and Florencia Padilla-Dualan of their real properties as payment for their subscription to the shares of stocks of Terra Flora Realty and Development Corporation, considering that after the exchange of properties and as a result of said exchange, the spouses will gain control of said corporation. cdti It should be emphasized, however, that Section 34(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 stocks acquired by them in the exchange, they shall be subject to income tax on the gains derived from such sale or exchange, taking into consideration that the cost basis of the shares of stocks 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), 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 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 property transferred, or of their interest in such property, 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 the property received from the transferors; 2. A statement of the original acquisition cost or other basis of the property in the hands of the transferors and the adjusted cost basis thereof at the time of the transfer and; a. The total issued and outstanding capital stock prior to and immediately after the exchange, with a complete description of each class of stocks; 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. acd 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 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 aforesaid deed. (BIR Ruling No. 245-00-000-00-102-82 dated April 6, 1982) Furthermore, under then Section 222 of the Tax Code, documentary stamp taxes prescribed under Title VI of the same Code shall become due and payable at the time such act is done or transaction had. Accordingly, the documentary stamp tax in the instant case on the Deed of Assignment executed and notarized on May 7, 1982 became due and payable as of said date at the rate prescribed under then Section 245 of the same Code. Consequently, the failure of the parties to affix the correct amount of documentary stamps subjects them to a fine of not less than twenty pesos nor more than three hundred pesos under then Section 251 of the Tax Code. After payment of the corresponding documentary stamp tax including its corresponding penalty, the aforesaid real properties may now be registered by the Registry of Deeds concerned in the name of Terra Flora Realty and Development Corporation. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner