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

December 9, 1992 BIR RULING NO. 353-92 34 (c) (2) (c) 289-92 353-92 Octavo, Fung, Tagle & Associates Certified Public Accountant San Fernando, La Union Attention: Mr . Rodolfo B . Octavo Gentlemen : This refers to your letter dated August 24, 1992 requesting in effect, a confirmation of your opinion that the transfer of properties by spouses Rodolfo A. Tiu and Rebecca S. Tiu in favor of your client, La Union Fortune Realty and Holdings Corporation, in exchange for the latter's 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. LibLex It is represented that La Union Fortune Realty and Holdings Corporation is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital value of P100.00 per share, of which 37,500 shares were subscribed and paid as follows: Stockholder No of Stocks Total Amount Subscribed Subscribed Rodolfo A. Tiu 18,750 P1,275,000.00 Rebecca B. Tiu 11,250 1,125,000.00 Michael B. Tiu 3,750 375,000.00 Jacky Rowena B. Tiu 1,375 187,000.00 Angel A. Tiu 1,375 187,000.00 Total 27,500 P3,750,000.00 ====== =========== that spouses Rodolfo A. Tiu and Rebecca B. Tiu are absolute and registered owners of three (3) parcels of land located in San Fernando, La Union covered by Transfer Certificates of Title Nos. T-12160, T-21992 and T-32550 issued by the Register of Deeds of La Union; that on August 21, 1992 the said spouses executed a Deed of Exchange of all the abovementioned properties with all the improvements thereon in favor of the La Union Fortune Realty and Holdings Corporation as full payment of their above subscriptions; and that as a result of the above transaction, the spouses gained control of the corporation by owning at least 51% of the voting 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 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 requirements. 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 actual voting power of all classes of stocks entitled to vote. Control is determined by the amount of stocks received, i.e., 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 by the transferors and the transferee corporation on the transfer by spouses Rodolfo A. Tiu and Rebecca B. Tiu of their properties in exchange for shares of stock of the transferee corporation, La Union Fortune Realty and Holdings Corporation, considering that as a consequence of the exchange, the transferors gained control of the transferee corporation, is hereby confirmed. LLphil 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 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)(c) 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 stock 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 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 stocks; 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 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 or deed whereby land is assigned or transferred to one purchaser is subject to documentary stamp based on the consideration or value received or contracted to be paid to 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 245-00-000-00-109-82 dated April 6, 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 La Union Fortune Realty and Holdings 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 said properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, La Union Fortune Realty and Holdings Corporation. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall 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