Tax Consequence of Transfer of Property in Exchange for Shares of Stock

December 9, 1992 BIR RULING NO. 352-92 34 (c) (2) (c) 320-92 352-92 Soto, Lacson & Associates 2/F Golden Heritage Bldg. Araneta St., Bacolod City Attention: Atty . Roxy D . Lacson Gentlemen : This refers to your letter dated August 28, 1992 requesting in effect, a confirmation of your opinion that the transfer of property by Aidsisa Integrated Industries, Inc. (AIII), and Victorias Milling Company, Inc. (VMC) to Caneland Sugar Corporation (CBC), in exchange for the latter's shares of stock is in accordance with Revenue Memorandum Order No. 26-92, and qualifies as a tax-free exchange under Section 34(c)(2)(c) of the Tax Code, as amended. It is represented that AIII and VMC are the co-owners of a parcel of land designated as Lot No. 966-B-1 (TCT No. T-10991) containing an area of 800,00 square meters more or less, including the sugar mill, buildings and improvements, machinery and equipment, farm and transportation equipment, furniture and office equipment, (formerly belonging to the Agro-Industrial Development Company of Bilay-Saravia, Inc.); that AIII interest over said property is 3/20 share, whereas VMC's interest is over a 17/20 share; that Caneland Sugar Corporation (CSC) is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Five Hundred Million (P500,000,000.00) pesos divided into Five Million (5,000,000) shares with a par value of P100.00 per share, of which 1,250.00 shares were subscribed and paid as follows: Name of No. of Shares Amount Subscriber Subscribed Subscribed Paid-in 1. Claudio R. de Luzuriaga, Jr. 1,249,990 P124,999,000.00 P31,249,000.00 2. Gerardo B. Javellana 1 100.00 100.00 3. Carlos H. Tupas 1 100.00 100.00 4. Joaquin L. Misa 1 100.00 100.00 5. Rolando C. Rodriguez 1 100.00 100.00 6. Cesar E. Ramos 1 100.00 100.00 7. Luis J. Padilla 1 100.00 100.00 8. Dominador P. Abelido, Jr. 1 100.00 100.00 9. Benjamin J. Bautista 1 100.00 100.00 10. Herman R. Lopez, Jr. 1 100.00 100.00 11. Jose Celestino Villacin, Jr. 1 100.00 100.00 Total 1,250,000 P125,999,000.00 P31,250,000.00 ======= ============ =========== that AIII will transfer its 3/20 share in the aforementioned properties to CBC in exchange for 388,451 shares of unissued CSC authorized capital stock at P100.00 per share; that VMC will also transfer its 17/20 share in the above-described property in exchange for 1,882,719 shares of unissued CSC authorized capital stock at P100.00 per share also as full payment of its cash advances/outstanding loan from CSC in the total amount of P31,250,000.00; and that after the exchange VMC's shares alone will constitute 53.54% of the outstanding capital stock of CSC or 64.56% together with AIII; and that the resulting shares of the transferors and those of the other shareholders shall be as follows: Name of No. of Shares Amount Subscriber Subscribed Subscribed Paid-in 1. Claudio R. de Luzuriaga, Jr. 1,249,990 P124,999,000.00 P31,249,000.00 2. Gerardo B. Javellana 1 100.00 100.00 3. Carlos H. Tupas 1 100.00 100.00 4. Joaquin L. Misa 1 100.00 100.00 5. Rolando C. Rodriguez 1 100.00 100.00 6. Cesar E. Ramos 1 100.00 100.00 7. Luis J. Padilla 1 100.00 100.00 8. Dominador P. Abelido, Jr. 1 100.00 100.00 9. Benjamin J. Bautista 1 100.00 100.00 10. Herman R. Lopez, Jr. 1 100.00 100.00 11. Jose Celestino Villacin, Jr. 1 100.00 100.00 12. Victorias Milling Co., Inc. 1 100.00 100.00 13. Aidsisa Integrated Industries, Inc. 1 100.00 100.00 Total 3,527,170 P352,717,000.00 P258,967,000.00 ======== =========== =========== Actual (see Secretary's Certificate) P258,966,410.66 Less: Cash advances of VMC from CSC 31,250,000.00 Adjusted Total P227,716,410.66 ============ 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 transferor 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 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 same transaction may be counted up to a maximum of five. In the instant case, even if the amount of the paid-in capital Attributed to VMC was reduced by P31,250,000.00 (representing cash advance by VMC from CSC), still the transferors VMC and AIII with a combined paid-in capital stock in the amount of P224,467,000.00 [(P188,871,900.00 P31,250,000.00) + P33,845,100.00)] will retain not less than 51% stock ownership as a result of this exchange transaction. Accordingly, your opinion that no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by VMC and AIII of their property in exchange for shares of stock of CBC 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 sells 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. cdt 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: 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 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 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 be 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 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, under Section 248(d) in relation to Section 173 of the Tax Code as amended by Executive Order No. 273, in case of failure to affix the proper documentary stamp to a document or instrument, there shall, for every violation, be imposed, in addition to the amount of documentary stamp tax required to be paid, an amount equivalent to twenty-five percent of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. cdtech Finally, the certificate of stocks to be issued by CSC 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 Registry of Deeds concerned in the name of the transferee corporation Caneland Sugar 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. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue