Transfer of Property for Stocks - Tax-Free Exchange

November 18, 1993 BIR RULING NO. 447-93 TRANSFER OF PROPERTY FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) (c) 324-93 447-93 Telan, Cabatit & Avanzado Law Offices 136 Yakal Street, Makati Metro Manila Attention: Atty . Joaquin P . Telan This refers to your letter dated May 24, 1993 requesting for confirmation of your opinion that the transfer of real property by Luisita G. David in favor of your client, Essential Properties, Inc. in exchange for its 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. It is represented that Essential Properties, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of P20,000,000.00 divided into 200,000 shares with a par value of P100.00 per share, of which 79,480 shares were subscribed as follows: Name No. of Shares Amt. Subscribed Luisita G. David 54,480 P5,448,000.00 Evelyn G. David 6,250 625,000.00 Garnet S. David 6,250 625,000.00 Rey Anthony S. David, Jr. 6,250 625,000.00 Joaquin P. Telan 6,250 625,000.00 Total 79,480 P7,948,000.00 ===== ========== that Luisita G. David is the absolute and registered owner of a parcel of land and improvements thereon located at 136 Yakal St., San Antonio, Makati, Metro Manila, with an area of 681 square meters, and covered by Transfer Certificate of Title No. S-109933 issued by the Registry of Deeds of Makati; that on April 12, 1993, Luisita G. David executed a Deed of Assignment of the abovementioned property in favor of Essential Properties, Inc. as full payment of her above subscriptions in the total amount of P5,448,000.00; that as a result of the above transaction, Luisita G. David gained control of the corporation by owning 68.5% of the subscribed capital stock of the said corporation as shown above; 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 transfer certificate of title and the corresponding tax declaration; (d) certification as to the original or historical cost of acquisition/adjusted cost basis of the properties 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 documents. In reply thereto, please be informed 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 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. LibLex Accordingly, your opinion that no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by Luisita G. David of her property together with the improvements thereon in exchange for shares of stock of the transferee corporation, Essential Properties, Inc., 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 property or of the stocks involved in the exchange, the original or historical cost of the property or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by her in the exchange, she 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 property 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 transferor [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 transferor shall file with her income tax return for the taxable year in which the exchange transaction was consummated, a complete statement of the facts pertinent to the exchange, including: 1. A description of the property transferred, or of her interest in such property, 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 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 property received from the transferor; 2. A statement of the original acquisition cost or other basis of the property 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 the 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 transferor. 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 shares/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 stock, the date the deed of exchange was executed, the original or historical cost of acquisition of the property or shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange. cdll 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 the 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 stock 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 Essential Properties, Inc. 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 properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, Essential Properties, Inc. 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. cdt LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue