Taxability of Transfer of Properties in Exchange for Shares of Stock

December 3, 1992 BIR RULING NO. 345-92 34 (c) (2) (c) 312-92 345-92 Mr. & Mrs. Arturo M. Dimayuga 2282 Magnolia St., Dasmarias Village Makati, Metro Manila Gentlemen : This refers to your letter dated 20 November 1992 requesting in effect, a confirmation of your opinion that the transfer of your properties in favor of Andar Enterprises. Inc., in exchange for its 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. LexLib It is represented that Andar Enterprises, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of P2,000,000.00 divided into 20,000 shares with a par value of P100.00 per share, of which 24,200 shares were subscribed and paid as follows: Stockholder No. of Stocks Total Amount Amount Paid Arturo K. Dimayuga 12,000 1,200,000.00 1,200,000.00 Andrea E. Dimayuga 12,000 1,200,000.00 1,200,000.00 Sandra E. Dimayuga 60 6,000.00 6,000.00 Cynthia D. Cervantes 60 6,000.00 6,000.00 Arturo C. Dimayuga, Jr. 20 2,000.00 2,000.00 Total 24,200 P2,420,000.00 P2,400,000.00 ====== ========== ========== that you are the absolute and registered owners of the following conjugal properties: a. Parcel of land and improvements thereon consisting of 225 square meters located at Barrio Jolo, Mandaluyong, covered by TCT No. 164060 and declared under Tax Declaration Nos. C-022-00092 and B-022-03460 (imp.), issued by the Registry of Deeds of Pasig, Rizal; b. Parcel of land and improvements thereon consisting of 1,571 square meters located at Pasay Road, Makati, Metro Manila covered by TCT No. 342401 and declared under Tax Declaration Nos. E-004-00378 and E-004-00379 (imp.) issued by the Registry of Deeds of Pasig, Rizal; c. Parcel of land consisting of 491.5 square meters located at Retiro, Quezon City covered by TCT No. 53459 and declared under Tax Declaration No. B-106-00565 issued by the Registry of Deeds of Quezon City; d. Parcels of land consisting of 1,093.10, 327 and 136.40 square meters located at Sta. Ana, Manila covered by TCT No. 70305 and declared under Tax Declaration No. B-098-00190 issued by the Registry of Deeds of Manila. that on 9 December 1985, spouses Arturo and Andrea Dimayuga executed a Deed of Assignment of all their abovementioned properties in favor of Ander Enterprises, Inc. as full payment of their above subscription; that as a result of the above transaction, the spouses gained control of the corporation by owning at least 99.17% of the total voting stocks of the said 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 the SEC of the transferee corporation; (c) copies of the corresponding tax declaration; (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 transferors 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 the 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 the said corporation. The term "control" shall mean ownership of stocks in a corporation accounting for at least 51% of the 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 sale 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 your transfer of your abovementioned conjugal properties in exchange for shares of stock of the transferee corporation, Ander Enterprises, Inc., considering that as a consequence of the exchange, you 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 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 shall be 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, with a statement of the original acquisition cost/adjusted cost 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 and 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 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 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 for 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 Certificate of Title 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 the properties or shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange. cdta 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. Accordingly, if 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. 245-00-000-109-82 dated April 04, 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 stocks to be issued by Ander Enterprises, 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 said real properties may be registered by the Register of Deeds in the name of the transferee corporation, Ander Enterprises, 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. Very truly yours, VICTOR A. DEOFERIO, JR. Deputy Commissioner & Officer-In-Charge