Transfer of Properties for Stocks - Tax-Free Exchange

December 22, 1993 BIR RULING NO. 499-93 TRANSFER OF PROPERTIES FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) (c) 418-93 499-93 Glowide Enterprises, Inc. 110 Rada St., Legaspi Village Makati, Metro Manila Attention: Ms . Mary C . Maquilan Corporate Secretary This refers to your letter dated November 23, 1993, requesting in effect, for a ruling on non-recognition of gain on the transfer of properties by stockholders, Naraindas Gagoomal and Engracio Ang, in favor of your company, Glowide Enterprises, Inc., in exchange for its shares of stock. It is represented that Glowide Enterprises, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an increased authorized capital stock from P400,000.00 to P60,000,000.00 divided into 600,000 shares with a par value of P100.00 per share, which were subscribed as follows: A. Stockholders and their holdings on record before the proposed in increase in capital . Name No. of Shares Amt. Subscribed Gideon Sison 596 P59,600.00 Stanlife Properties Ltd. 400 40,000.00 Engracio Ang 1 100.00 Naraindas Gagoomal 1 100.00 Elizabeth Cheng 1 100.00 Mary Maquilan 1 100.00 Total 1,000 P100,000.00 ==== ========== B. Stockholders and their holdings after the proposed increase in capital : Name No. of Share Amt. Subscribed Gideon Sison 596 P59,600.00 Stanlife Properties Ltd. 400 40,000.00 Engracio Ang 150,001 15,000,100.00 Naraindas Gagoomal 150,001 15,000,100.00 Elizabeth Cheng 1 100.00 Mary Maquilan 1 100.00 Total 301,000 P20,100,000.00 ====== =========== that Naraindas Gagoomal and Engracio Ang are the absolute and registered owners of nine (9) parcels of land and the improvements thereon, situated in Balintawak, Quezon City, and covered only by four (4) Transfer Certificates of Title Nos. 56683, 56684, 56685 and 56686 issued by the Register of Deeds of Quezon City; that on November 23, 1993, Mr. Naraindas Gagoomal and Engracio Ang executed a Deed of Assignment of the abovementioned properties in favor of Glowide Enterprises, Inc. as full payment of their above subscriptions in the increased capital stock in the total amount of P30,000,000.00 for each stockholder; that as a result of the above transaction, the said assignors gained control of the corporation by owning 99.67% 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 certificates of title and the corresponding tax declarations; (d) certification as to the original or historical cost of acquisition/adjusted cost basis of the properties transferred in the total amount of P30,000,000.00; (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 transferors as a result of the transaction; and (g) other pertinent documents. In reply thereto, please be informed that pursuant to Section 34, paragraphs (c) (2) and (6) (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, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer of properties and the improvements thereon by stockholders, Naraindas Gagoomal and Engracio Ang, in favor of the transferee corporation, Glowide Enterprises, Inc., in exchange for its shares of stock, considering that as a consequence of the said exchange, said stockholders-transferors gained control of the transferee corporation by owning 99.67% of its total voting stock. It should be emphasized, however, that Section 34(c) (2) and (6) (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 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 properties exchanged therefor; and that the cost basis to the transferee corporation 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) and (6)(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, 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 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 all properties received from the transferors; 2. A statement of the original acquisition cost or other basis of the properties 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 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 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 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 Glowide Enterprises, 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, Glowide Enterprises, 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. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue