Tax Consequence of Transfer of Real Properties as payment for the Issuance of Shares of Stocks

December 16, 1987 BIR RULING NO. 402-87 35 (c) (2) (c) 204-87 402-87 S i r : This refers to your letter dated November 17, 1987 requesting a ruling on the tax consequence of the transfer by your clients, spouses, Honorio Santiago and Estrellita Santiago of their real property in favor of Estrellita Realty and Development Corporation. It is represented that on July 31, 1983, your clients organized Estrellita Realty and Development Corporation with a capital stock of P1,600,000.00 divided into 160,000 shares at a par value of P10.00 per share; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up, viz: No. of share Capital Stock Amount paid Name Subscribed Subscribed on Subscription Honorio Santiago 16,000 P160,000.00 P40,000.00 Estrellita Santiago 16,000 160,000.00 40,000.00 Ananias Simundac 3,200 32,000.00 8,000.00 Artemio Simundac 1,600 16,000.00 4,000.00 Carlito Simundac 1,600 16,000.00 4,000.00 Ruben Simundac 1,600 16,000.00 4,000.00 40,000 P400,000.00 P100,000.00 ===== ========= ========= that on August 10, 1987 and September 24, 1987, spouses Honorio Santiago and Estrellita Santiago assigned and transferred real properties situated in Alabang, Muntinlupa covered by Transfer Certificate of Title Nos. S-59023, S-74690, 124358, S-84934 and 111737 to Estrellita Realty and Development Corporation in payment of their subscription of 24,000 shares and to the unissued portion of the capital stock consisting of 60,000 shares; that the balance of P708,800 shall be paid by the spouses in cash; and that after the exchange and as a result of the exchange, the transferors gained further control of the corporation by owning more than 51% of the total voting power of all classes of stocks entitled to vote. 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 stock 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 and transferee corporation on the transfer by the spouses Honorio Santiago and Estrellita Santiago of their real properties as payment for the issuance of shares of stocks of Estrellita Realty and Development Corporation, considering that after the exchange of properties and as a result of said exchange, they will gain further control of said 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 the exchange, they shall be subject to income tax on the 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 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 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 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 property transferred, or of their interest in such property, together 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 preference 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 property in the hands of the transferors and the adjusted cost basis thereof at the time of the transfer and: a. The total issued and outstanding capital stock prior to and immediately after the exchange, with a complete description of each class of stocks, 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, present 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. 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 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. 248-00-000-00-109-82 dated April 6, 1982) The certificates of stocks to be issued by Estrellita Realty and Development Corporation are, in all probability, original issues, which are subject to the documentary stamp tax imposed by Section 188 of the Tax Code, as amended. Furthermore, under Section 282(d) in relation to Section 186 of the Tax Code as amended by Executive Order No. 37, 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 283 of the same Code. After payment of the corresponding documentary stamp tax including its corresponding penalty, the aforesaid real properties may now be registered by the Registry of Deeds concerned in the name of Estrellita Realty and Development Corporation. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner