Tax Consequence of the Proposed Transfer of Properties to a New Corporation in Exchange for Shares of Stock

November 25, 1987 BIR RULING NO. 382-87 35 (c) (2) (c) 274-87 382-87 Gentlemen : This refers to your letter dated September 25, 1987 requesting a ruling on the tax consequence of the proposed transfer by Greenfield Development Corporation and United Laboratories, Inc. of their properties to a new corporation to be organized by them in exchange for the latter's shares of stock. It is represented that Greenfield Development Corporation (GDC) is a corporation duly organized and existing under the laws of the Philippines; that it is engaged primarily in the real estate business and has properties in the area of Shaw Boulevard and E. delos Santos Avenue, Mandaluyong, Metro Manila; that United Laboratories, Inc., (ULI) is likewise a corporation duly organized and existing under the laws of the Philippines; that it is engaged primarily in the manufacture and sale of pharmaceutical products and also has properties within the same area as those properties owned by GDC, which are not contiguous to one another; that the two corporations had discussed of joining together their said properties which will consolidate the area into one integrated development of a commercial center to maximize its economic use and also to economize on expenses; that for this purpose, said corporations shall organize a new corporation of which GDC and ULI shall be the principal and controlling stockholders; that GDC and ULI will contribute as paid-in capital to the new corporation their respective real estate properties which shall be appraised by a common real estate appraiser; that the appraised values of the properties shall be used as the values for which the capital stock of the new corporation shall be determined and each corporation (GDC) and ULI) shall then received in exchange of their properties only and solely the shares of stock of the new corporation; and that in the event that the new corporation shall need operating capital and/or funds for improvements, each corporation shall contribute their respective funds in proportion to their shareholdings unless they shall agree otherwise. cdta In reply, I have the honor to inform you that pursuant to Section 35, paragraph (c)(2)(c) of the Tax Code as amended by Republic Act No. 4522 and Presidential Decree 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., subscribed and paid-up, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stock 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, Greenfield Development Corporation and United Laboratories, Inc. and the transferee corporation, the new corporation to be organized, considering that after the proposed exchange and as a result of the proposed exchange, the transferors will gain control of the new corporation. It should be emphasized, however, that Section 35 (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 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 of stock shall be the same as the original acquisition cost or adjusted cost basis to the transferors of the properties exchanged therefore; 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 35(c)(5)(a) and (b), Tax Code, as amended by Presidential Decree No. 1773] In this connection, you are further advised that in order that the parties to the proposed exchange can avail of the non-recognition of gains provided for in Section 35(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 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 or other basis thereof and the adjusted cost basis 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 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 adjusted cost basis thereof at the time of the transfer; and 3. Information with respect to the capital stock of that 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 stock and number of shares issued to the transferors in the exchange; and c. The fair market value as of the date of 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 stock/properties received in the exchange. atdc Moreover, pursuant to Section 209 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 what is contemplated in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the aforesaid deed. (BIR Ruling No. 274-87 dated September 9, 1987) Should the aforementioned proposed transaction materialize and after payment of the corresponding documentary stamp tax, the aforesaid real properties may be registered by the Register of Deeds concerned in the name of the aforesaid new corporation. Finally, the certificates of stocks to be issued by the new corporation are, in all probability, original issues. Such being the case, said original issues are subject to the documentary stamp tax imposed by Section 188 of the Tax Code. Very truly yours, (SGD.) EUFRACIO D. SANTOS Officer-in-Charge