Transfer of Real Property for Stocks - Tax-Free Exchange

November 18, 1993 BIR RULING NO. 448-93 TRANSFER OF REAL PROPERTY FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) (c) 181-93 448-93 Jetri Construction Corporation Paco Pandana Townhomes 1845 Paz Mendoza Guanzon St. Paco, Manila Attention: Ms . Anastacia M . Corpus Chairman This refers to your letter dated March 8, 1993 requesting in effect, for a ruling that no gain or loss is recognized on the transfer of real property by Anastacia M. Corpus in favor of Jetri Construction Corporation in exchange for its shares of stock pursuant to Section 34(c)(2)(c) of the Tax Code, as amended. Documents submitted show that Jetri Construction Corporation is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Eight Million Pesos (P8,000,000.00) divided into Eight Hundred Thousand (800,000) shares with a par value of Ten Pesos (P10.00) each; and that the incorporators of the corporation with the corresponding number of shares subscribed and paid-up are as follows: LLphil No. of Amount Amount Name Shares Subscribed Paid Anastacia M. Corpus 60,000 P600,000.00 P150,000.00 Gregorio M. Corpus 50,000 500,000.00 125,000.00 Rondell C. Rodriguez 40,000 400,000.00 100,000.00 Melinda I. Corpus 30,000 300,000.00 75,000.00 Suzette Concepcion V. Salas 20,000 200,000.00 50,000.00 Total 200,000 P2,000,000.00 P500,000.00 ====== ========== ========= that Ms. Anastacia M. Corpus is the registered owner of a parcel of land covered by TCT No. 201106 situated in Sampaloc, Manila; that on March 30, 1993, a Deed of Assignment was executed by and between Ms. Anastacia M. Corpus and Jetri Construction Corporation whereby Ms. Anastacia M. Corpus transferred to the latter the abovementioned realty in exchange for Three Hundred Thirty-Three Thousand and Three Hundred Thirty-Five (333,335) shares of the capital stock of Jetri Construction Corporation at the par value of P10.00 per share; that as a result of the above transaction, Ms. Anastacia M. Corpus gained control of the corporation by owning at least 58% of the total voting stocks of the said corporation; and that in support of your aforesaid request, you submitted to this Office the following documents: 1. Deed of Assignment; 2. Articles of Incorporation of Jetri Construction Corporation; 3. Transfer Certificate of Title; 4. Tax Declaration; 5. Certification as to the original or historical cost of acquisition of the property (P2,100,000.00); 6. Certification of Zonal Value of the property; and 7. Certification of the authorized capitalization and of percentage of ownership of stock of transferor after the transfer of property. 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. Accordingly, your opinion that no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by you of your property in exchange for shares of stock of the transferee corporation, Jetri Construction Corporation, considering that as a consequence of the exchange, the transferor gained control of the transferee corporation, by owning 58% of the total voting stocks of said 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 must file with her 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 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 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 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 the stocks/property received in the exchange. The parties shall also cause to be annotated on the Transfer Certificate 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 property 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 such 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 Jetri Construction 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, Jetri Construction 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. prcd LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue