Transfer of Properties forSstocks - Tax-Free Exchange

September 6, 1993 BIR RULING NO. 366-93 TRANSFER OF PROPERTIES FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) (c) 321-93 366-93 Castillo, Laman, Tan & Pantaleon The Valero Tower 122 Valero Street, Salcedo Village 1227 Makati, Metro Manila Attention: Atty . Yunira L . Francisco This refers to your letter dated August 9, 1993 requesting in effect, for confirmation of your opinion that no gain or loss is recognized on the transfer of real properties by the spouses Romeo V. Custodio and Ma. Aurora V. Custodio to Darcyco Realty Corporation (DARCYCO for brevity) in exchange for its shares of stock in accordance with Revenue Memorandum Order No. 26-92, and falling under Section 34(c) (2) (c) of the Tax Code, as amended. cdtech It is represented that Darcyco Realty Corporation is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Seven Million Pesos (P7,000,000.00), Philippine currency, divided into Seven Hundred Thousand (700,000) shares with a par value of Ten Pesos (P10.00) 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 Romeo V. Custodio 329,904 P3,299,040.00 P3,299,040.00 Ma. Aurora Y. Custodio 329,904 P3,299,040.00 3,299,040.00 Rosauro Y. Custodio 96 960.00 960.00 Ma. Rowena Y. Custodio 48 480.00 480.00 Jose Mari Y. Custodio 48 480.00 480.00 Total 660,000 P6,600,000.00 P6,600,000.00 ====== =========== =========== that the spouses Romeo V. Custodio and Ma. Aurora Y. Custodio are the owners in fee simple of four (4) parcels of land with all the improvements thereon situated in Manila, Metro Manila, District No. II, Quezon City and San Mateo, Rizal, and covered by Transfer Certificates of Title Nos. 176821-ind. 263545 (PR-9969), RT-7703 (336077) and 507105 issued by the Register of Deeds for the City of Manila, Metro Manila, District No. II, Quezon City and San Mateo, Rizal; that on January 13, 1993, the Spouses executed a Deed of Transfer of their property located in Manila covered by TCT No. 176821-ind. in favor of DARCYCO in exchange for 442,808 shares of stock with a par value of P10.00 each; that as a result of the above transaction the assignors gained further control of the corporation; that on January 28, 1992, the Spouses executed another Deed of Transfer of their properties located in Quezon City covered by TCT Nos. 263545 (PR-9969) and RT-7703 (336077) in favor of DARCYCO in exchange for 172,000 shares of stock with a par value of P10.00 each; that as a result of the above transaction, the assignors gained further control of the corporation; that on March 16, 1993, the Spouses executed another Deed of Transfer of their property located in the Municipality of San Mateo, Rizal covered by TCT No. 507105 in favor of DARCYCO in exchange for 45,000 shares of stock with a par value of P10.00 each; that as a result of the above transaction, the assignors gained further control of the corporation; and that in support of your request, you submitted to this Office, the following documents: 1) Deed of Transfer; 2) Articles of Incorporation of DARCYCO; 3) Transfer Certificates of Title; 4) Tax Declarations; 5) Certification executed by the Custodio spouses as to the original or historical costs/adjusted cost basis of the properties transferred; 6) Certification of the appraisal reports prepared by an accredited Securities and Exchange Commission Property Appraiser covering the above properties; 7) Certification by the Corporate Secretary of DARCYCO of its authorized capital stock and par value of each share and percentage of ownership of the shares of stocks by the Custodio spouses as a result of the transaction; and 8) 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 property is transferred to a corporation by a person, in exchange for stocks 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 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, your opinion that no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by the spouses Romeo V. Custodio and Ma. Aurora Y. Custodio of their properties in exchange for shares of stock of the transferee corporation, Darcyco Realty Corporation, considering that as a consequence of the exchange, the Spouses gained further 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 in 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 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 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) 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 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 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 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 the 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 Certificates 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 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 for 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. Finally, the certificates of stock to be issued by Darcyco Realty 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 real property may be registered by the Register of Deeds concerned in the name of the transferee corporation, Darcyco Realty 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. aisadc LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue