Whether Transfer of Properties in Exchange for the Shares of Stock in Accordance with RMO 26-92, falls under Section 34 (c) (2) (c)

December 16, 1992 BIR RULING NO. 356-92 34 (c) (2) (c) 251-91 356-92 Four J'S Realty and Development Corp. 110 Samson Road Quezon City Attention: Ms . Olivia Limpe Aw Corporate Secretary Gentlemen : This refers to your letter dated September 14, 1992 requesting in effect, a confirmation of your opinion that the transfer of properties by Destileria Limtuaco & Co., Inc. (Destileria for brevity) to your company, Four J's Realty & Development Corporation (Four J's for brevity) 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. cdti It is represented that Four J's is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of One Hundred Fifty Million (P150,000,000.00) divided into One Hundred Fifty Thousand (150,000) shares with a par value of One Thousand Pesos (P1,000.00) per share, of which Thirty Seven Thousand Five Hundred (37,500) shares were subscribed and paid as follows: No. of Amount Name Shares Subscribed Amount Paid Tah, Siu Yong Limpe 20 P20,000.00 P5,000.00 Julius T. Limpe 20 20,000.00 5,000.00 Jerry T. Limpe 20 20,000.00 5,000.00 Lily C. Limpe 20 20,000.00 5,000.00 Olivia L. Aw 20 20,000.00 5,000.00 Destileria Limtuaco & Co., Inc. 37,400 37,400,000.00 9,350,000.00 Total 37,500 P37,500,000.00 P9,375,000.00 ====== =========== =========== that Destileria is the absolute owner in fee simple of the following: TCT NO. LOCATION 1) 43186 Lucao, Malued, Dagupan City 2) 43187 Lucao, Malued, Dagupan City 3) 43188 Lucao, Malued, Dagupan City 4) 16940 Marigondon, Lapu lapu City 5) 27958 Pac-naan, Mandaue City 6) T-38027 Kauswagan, Cagayan de Oro City 7) T-36523 Lapasan, Cagayan de Oro City 8) T-36536 Lapasan, Cagayan de Oro City 9) T-38026 Kauswagan, Cagayan de Oro City 10) T-64588 Sta. Catalina, Zamboanga City 11) T-64680 Sta. Catalina, Zamboanga City 12) T-64681 Sta. Catalina, Zamboanga City 13) T-64682 Sta. Catalina, Zamboanga City that on September 2, 1992 and June 22, 1992, Deeds of Assignment was executed by and between Destileria and Four J's whereby the former transferred to the latter the above-mentioned properties in exchange for its unpaid subscription to the capital stock of the corporation; that you submitted to this Office photocopies of the following documents: 1. Deed of Assignments; 2. Articles of Incorporation of Destileria Limtuaco & Co., Inc. and Four J's Realty & Development, Corporation 3. Thirteen (13) Transfer Certificate of Titles; 4. Copies of the Corresponding Tax Declarations; 5. Appraisal Reports by Asian Appraisal Co., Inc.; and 6. Certifications of Corporate Secretary. 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. llcd Accordingly, your opinion that no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by Destileria of its properties in exchange for shares of stock of the transferee corporation, Four J's, considering that as a consequence of the exchange, the transferor 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 transferor later sells or exchange the shares of stocks acquired by it in the exchange, it 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 transferor of the properties exchanged therefor; and that the cost basis to the transferor of the properties exchanged for stocks shall be the same as it would be in the hands of the transferor. (Section 34 (c) (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 transferor must file with its 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 its interest in such properties, 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 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 transferor 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 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 stocks 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 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. cdll Finally, the certificates of stocks to be issued by Four J's Realty and Development Corporation are, in all probability original issues, which are subject to documentary stamp tax imposed by Section 173 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, Four J's Realty and Development Corp. 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