Taxability of the Transfer of Properties in Exchange for Shares of Stock

November 23, 1992 BIR RULING NO. 331-92 34 (c) (2) (c) 286-92 331-92 Fernandez, Santos, & Lopez 20th/21st Floors, Metrobank Plaza Sen. Gil J. Puyat Avenue Makati, Metro Manila Attention: Lovell R . Bautista Partner Gentlemen : This refers to your letter dated January 30, 1992 requesting confirmation of your opinion that the transfer of properties by your clients, spouses Serafin G. Cheng and Ruby D. Cheng, in favor of the D & C Corporation in exchange for its shares of stock in accordance with Revenue Memorandum Order No. 26-82, falls under Section 34(c)(2)(c) of the Tax Code, as amended. cdtech It is represented that D & C Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that it is proposing to change its corporate name to "SR Holding and Management Corporation" and to increase its authorized capital stock from P500,000.00 to P30,000,000.00 or from 5,000 common shares to 300,000 common shares respectively, with a par value of P100.00 per share, which were subscribed and paid as follows: A. Stockholders and their holdings on record before proposed increase in capital Name No. of shares Subscribed and Paid-in Sefarin G. Cheng 700 P70,000.00 Ruby D. Cheng 400 P40,000.00 Patrick D. Cheng 400 P40,000.00 Matthew D. Cheng 400 P40,000.00 Arlene D. Cheng 100 P10,000.00 Sandra C. Yan 100 P10,000.00 Total 2,100 P210,000.00 ==== ========== B. Stockholder and their holdings after the proposed increase in capital Name No. of shares Subscribed and Paid-in Sefarin G. Cheng 73,079 P7,307,900.00 Ruby D. Cheng 69,205 6,920,500.00 Patrick D. Cheng 400 40,000.00 Matthew D. Cheng 400 40,000.00 Arlene D. Cheng 100 10,000.00 Sandra C. Yan 100 10,000.00 Total 143,234 P14,323,400.00 ====== =========== that the spouses Serafin G. Cheng and Ruby D. Cheng are the absolute and registered owners of the following properties: SERAFIN G. CHENG: a. Parcel of land, 321 sq. m., located at Mabini St., Addition Hills, Mandaluyong, Metro Manila, covered by TCT No. 62009; b. Improvements on residential houses (A) & (B) located at #827 A. Mabini St., Mandaluyong, Metro Manila, with the areas of 362.87 and 258.12 square meters, and covered by TDN Nos. B-001-02551 and B-001-02552 respectively, and c. One (1) share of stock in Wack-Wack Golf and Country Club. RUBY D. CHENG: a. Parcel of land, 1,063 square meter, located at Mabini St., Addition Hills, Mandaluyong, Metro Manila covered by TCT No. 424402; and b. Parcel of land, 1,293 square meters, located at Bgy. Haraytigue, Nasugbu, Batangas, covered by TCT No. T-24390 that on January 3, 1992 spouses Serafin G. Cheng and Ruby D. Cheng executed their respective Deeds of Assignment in favor of D & C Corporation of all of the above-mentioned properties as full payment of their subscriptions to the increased capital stock of the said corporation in the amount of P14,113,400.00; that as a result of the above transaction, the spouses gained control of the corporation, by owning at least 51% of the subscribed capital stock of the corporation; 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 corresponding tax declaration; (e) certification as to the original or historical cost of acquisition/adjusted cost basis of the properties transferred; (f) certification by the corporate secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stock; and (g) certification of percentage of ownership of the shares of stock by the transferor as a result of the transaction. cdta 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 transferors and the transferee corporation on the transfer by spouses the Serafin D. Cheng and Ruby D. Cheng of their properties together with the improvements thereon in exchange for shares of stock of the transferee corporation, D & C Corporation, considering that as a consequence of the exchange, the transferors 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 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 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 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: cdti 1. A complete description of all properties received from the transferors; 2. A statement of the original acquisition cost or other basis of 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 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 the annotated on the Transfer Certificate of Titles and at the back of the Certificate of Stocks, the date the deed of exchange was executed, the original or historical cost of acquisition of 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 D & C 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 properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, D & C 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. llcd Very truly yours, JOSE U. ONG Commissioner of Internal Revenue