Transfer of Properties for Stocks - Tax-Free Exchange

August 11, 1993 BIR RULING NO. 351-93 TRANSFER OF PROPERTIES FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) (c) 108-89 351-93 E.S. Pasamba & Co. 4/F CDC Building, 1195 Orosa St. Ermita, Manila Attention: Atty . Eladio S . Pasamba Managing Partner This refers to your letter dated April 23, 1993 requesting for a ruling on the tax consequence of the assignment of real estate properties of the spouses Armando Pantaleon and Socorro D. Pantaleon in exchange for shares of stock of Distinction Lamps and Furniture, Inc. cdtech Documents submitted show that Distinction Lamps and Furniture, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Five Million Pesos (P5,000,000.00); divided into One Thousand (1,000) shares with a par value of Five Thousand Pesos (P5,000.00) per share; that the incorporators of the corporation with the corresponding number of shares subscribed and paid-up are as follows: No. of Amt. Name Shares Subscribed Amt. Paid Armando R. Pantaleon 458 P2,290,000.00 P2,290,000.00 Socorro D. Pantaleon 457 2,285,000.00 2,285,000.00 Patrick D. Pantaleon 1 5,000.00 1,250.00 Maria Reina Pantaleon 1 5,000.00 1,250.00 Divina D. Pantaleon 1 5,000.00 1,250.00 Enrique D. Pantaleon 1 5,000.00 1,250.00 Rubi Rosa Pantaleon 1 5,000.00 1,250.00 Anna Rocio D. Pantaleon 1 5,000.00 1,250.00 Armand Fidel Pantaleon 1 5,000.00 1,250.00 Total 9,229 P4,610,000.00 P4,583,750.00 ====== =========== ============ that the spouses Armando Pantaleon and Socorro D. Pantaleon are the registered owners of a parcel of land together with the improvements thereon, situated in Quezon City covered by Transfer Certificate of Title No. 175629 PR 15890 issued by the Register of Deeds of Quezon City; that the abovementioned parcel of land has a fair market value of Six Million P6,000,000.00 Pesos based on the BIR zonal value of P6,000.00 per square meter, and Five Hundred Seventy-Five Thousand (575,000) Pesos on the improvements per its Tax Declaration; that the spouses Armando R. Pantaleon and Socorro D. Pantaleon have constituted a Real Estate Mortgage on the abovementioned parcel of land and the improvements thereon with the United Coconut Planters Bank in the amounts of One Million Five Hundred Thousand (P1,500,000.00) Pesos and Five Hundred Thousand (P500,000.00) Pesos with the United Coconut Planters Life Assurance Corporation; that the spouses Armando Pantaleon and Socorro D. Pantaleon have offered to transfer, convey and assign the abovementioned parcel of land and the improvements thereon in favor of Distinction Lamps & Furniture, Inc. as full payment of their subscription to the capital stock of the latter which in turn accepted the offer; that in May, 1993 a Deed of Assignment was executed by and between the spouses Armando Pantaleon and Socorro D. Pantaleon and Distinction Lamps & Furniture, Inc. whereby the spouses transferred to the latter the abovementioned property with the latter assuming the Real Estate Mortgage on the said realty, in exchange for their unpaid subscription to the capital stock of the corporation; that as a result of the above transaction the spouses gained further control of the corporation by owning 99% of the total capital stock of the aforesaid corporation and that in support of their aforementioned request, they submitted to this Office, the following documents: 1. Deed of Assignment 2. Articles of Incorporation of Distinction Lamps & Furniture, Inc.; 3. Transfer Certificate of Title; 4. Tax Declaration; 5. Certification as to the original or historical cost of acquisition of the property; 6. Certification of Fair Market Value; and 7. Certification of its authorized capitalization and of percentage of ownership of stock of transferors after transfer of property. In reply, please be informed 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 stocks 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 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, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by the spouses Armando Pantaleon and Socorro D. Pantaleon of their real property together with all the improvements existing thereon as/in full payment for their subscription to the capital stock of Distinction Lamps & Furniture, Inc. considering that after the exchange of properties and as a result of said exchange, they will gain further control of the said corporation. 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 stock 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 stock shall be the same as the original acquisition cost or adjusted cost basis to the transferors of the property exchanged therefor; and that the cost basis to the transferee of the property 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]. If pursuant to the exchange transaction, and as a part of the consideration, the transferee corporation assumes the liability of the transferors or acquires from the transferors property subject to a liability, such assumed or acquired liability shall not be treated as money and/or other property, and shall not prevent the exchange, from being tax free [Sec. 34(c)(4)(a) of the Tax code, as amended by P.D. No. 1773]. If the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceed the total of the adjusted cost basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be [Sec. 34(c)(4)(b) of the Tax Code, as amended by P.D. No. 1773]. The cost basis or value of the stocks received by the transferors of the property subject to a liability, where the liability transferred and assumed by the transferee corporation does not exceed the transferors' basis or the original and/or acquisition cost of the property transferred, shall be the difference between the liability or liabilities assumed by the transferee corporation and the acquisition or original cost of the property transferred. On the other hand, where the total liabilities to be assumed by the transferee corporation exceed the original or acquisition cost of the property transferred, the excess shall be recognized as gain to the transferors and the value or cost basis of the stocks to the transferors shall be the difference between the original cost of the property transferred subject to a liability (plus the gain recognized to the transferors) and the liability or liabilities assumed by the transferee corporation (Sec. 34(c)(5), Supra . 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 of the property 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 property transferred, or of their interest in such property, 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 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: 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 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 following 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 be annotated on the Transfer Certificate 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 of 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. Furthermore, the certificates of stocks to be issued by Distinction Lamps & Furniture, 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 corporation, Price Winner Marketing 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. cdta LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue