Transfer of Properties for Stocks - Tax-Free Exchange

November 19, 1993 BIR RULING NO. 453-93 TRANSFER OF PROPERTIES FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) 058-93 453-93 Mr. William Chua Cu Jamora Subdivision Barangay 20, Legaspi City This refers to your letter dated June 8, 1993, requesting in effect, for a ruling that no gain or loss is recognized on the transfer of your real property in favor of Krystle Realty Corporation in exchange for its shares of stock pursuant to Section 34(c)(2) of the Tax Code, as amended. LexLib Documents submitted show that Krystle Realty Corporation is duly registered with the Securities and Exchange Commission with an authorized capital stock of Ten Million Pesos (P10,000,000.00) divided into one hundred thousand (100,000) shares with a par value of One Hundred Pesos (P100.00); that the incorporators of the corporation with the corresponding number of shares subscribed and paid-up are as follows: No. of Amount Amount Name Shares Subscribed Paid William Cu 12,600 P1,260,000.00 P315,000.00 Avelina Tan Cu 6,400 640,000.00 160,000.00 Mary Jeanne Cu 1,000 100,000.00 25,000.00 Cherry Lyn Cu 1,000 100,000.00 25,000.00 John Michael Cu 1,000 100,000.00 25,000.00 Connie Lisa Cu 1,000 100,000.00 25,000.00 Tan Oliver Cu 1,000 100,000.00 25,000.00 Krystle Ritz Cu 1,000 100,000.00 25,000.00 Total 25,000 P2,500,000.00 P625,000.00 ===== ========== ========= that you are the registered owner of fifteen (15) parcels of land covered by TCTs Nos. T-79681, T-75546, T-76674, TCT No. 0-1090, TCT No. T-68690 of Albay; TCT No. 127320 of Pasay City; TCT No. 171117, 17123, 17124, T-24443 of Legaspi City; TCT No. 178821 of Alabang, Muntinlupa; Tax Decl. Nos. 034-01305; 044-00407; 044-00408; and 044-00409 of Polangui, Albay; that a Deed of Exchange of Real Property for shares of stock was executed by and between William C. Cu and Krystle Realty Development Corporation whereby Mr. William C. Cu transferred to the latter the abovementioned realty in exchange for 26,105 shares of stock of Krystle Realty Development Corporation at a par value of P100.00 per share; that as a result of the above transaction, you gained control of the corporation by owning 76% 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 Krystle Realty Development Corporation; 3. Transfer Certificates of Title; 4. Tax Declarations; 5. Certification of the original or historical cost of acquisition of the properties; 6. Certification of its authorized capitalization and of percentage of ownership of stocks 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 your transfer of property in exchange for shares of stock of the transferee corporation, Krystle Realty Development Corporation considering that as a consequence of the exchange, you, as transferor gained control of the transferee corporation, is hereby confirmed. It should be emphasized, however, that Section 34(c)(2) 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 properties or of the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by him in the exchange, he 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 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 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 his 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 his interest in such properties, 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 stock 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 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 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 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 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 Krystle Realty Development 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 properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, Krystle Realty Development 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. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue