Transfer of Property for Stocks - Tax-Free Exchange

November 17, 1993 BIR RULING NO. 457-93 TRANSFER OF PROPERTY FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) (c) 321-93 457-93 Fernandez, Santos & Lopez 21st Floor, Metrobank Plaza Sen. Gil J. Puyat Avenue Makati, Metro Manila Attention: E . A . Fernandez This refers to your letter dated March 10, 1993 requesting in effect, a confirmation of your opinion that no gain or loss is recognized on the transfer of real property by the Spouses Nestor L. Kalaw and Rebecca T. Kalaw to Carstel, Inc. in exchange for its shares of stock pursuant to Section 34(c)(2)(c) of the Tax Code, as amended. LibLex It is represented that Carstel, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Four Million Pesos (P4,000,000.00) divided into 40,000 shares with a par value of P100.00 each, the entire amount of which has been subscribed by the stockholders and paid up as follows: No. of Amount Name Shares Subscribed Amount Paid Nestor L. Kalaw 15,000 P1,500,000.00 P1,125,000.00 Rebecca T. Kalaw 10,000 1,000,000.00 750,000.00 Angela T. Kalaw 5,000 500,000.00 375,000.00 Stella T. Kalaw 5,000 500,000.00 375,000.00 Gerardo T. Kalaw 5,000 500,000.00 375,000.00 Total 40,000 P4,000,000.00 P3,000,000.00 ===== ========== ========== that the Spouses Nestor L. Kalaw and Rebecca T. Kalaw are the absolute owners of a parcel of land located at No. 3 Constellation, Bel-Air Village II, Makati, Metro Manila, with an area of Four Hundred Eighty-Seven (487) Square Meters, and with improvements thereon covered by Transfer Certificate of Title No. S-40257 issued by the Register of Deeds of Rizal; that on June 5, 1991, a Deed of Exchange was executed by and between the Spouses Nestor L. Kalaw and Rebecca T. Kalaw and Carstel, Inc. whereby the spouses transferred to the latter the above-mentioned property in exchange for Forty Thousand (40,000) shares of stock of the capital stock of the corporation; that as a result of the above transaction, the spouses gained control of the corporation by owning at least 51% of the total voting stock of the said corporation; and that in support of your request, you submitted to this Office, the following documents: 1) Deed of Exchange; 2) Articles of Incorporation, By-Laws and SEC Registration Certificate of Carstel, Inc.; 3) Transfer Certificate of Title; 4) Tax Declaration; 5) Certification as to the authorized capitalization of Carstel, Inc. and the percentage of ownership of the shares of stock by the transferors after the exchange transaction; 6) Certification to show the historical cost of the property; and 7) Zonal valuation. In reply thereto, I have the honor to inform you 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 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., 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 transferors and the transferee corporation on the transfer by the Spouses Nestor L. Kalaw and Rebecca T. Kalaw of their property in exchange for shares of stock of the transferee corporation, Carstel, Inc. considering that as a consequence of the exchange, the Spouses gained control of the transferee corporation by owning 62.5% of the total voting stocks, is hereby confirmed. The payment, however, made by the spouses of the paid-up capital of their three (3) children, namely: Angela; Stella and Gerardo, all surnamed Kalaw, in the total amount of P1,125,000.00 is subject to donor's tax. 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 that 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 transferors later sell or exchange the shares of stock acquired by them in the 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 shall be the same as the original acquisition cost or adjusted cost basis to the transferors 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 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 transferors must file with their 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 their interest in such property, with a statement of the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer; LLjur 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 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 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 transferors in the exchange; and c. The fair market value as of the date of the 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 stocks/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 Stocks, 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 certificate of stocks to be issued by Carstel, 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 property may be registered by the Register of Deeds concerned in the name of the transferee corporation, Carstel, 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. LLphil LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue