Transfer of Properties for Stocks - Tax-Free Exchange

December 22, 1993 BIR RULING NO. 504-93 TRANSFER OF PROPERTIES FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) & (6) (c) 70-93 04-93 N.T. Montoya & Sons, Inc. Araneta Street, Bacolod City Attention: Ms . Glenda M . Cabrera Corporate Secretary This refers to your letter dated October 1993 requesting a ruling on the tax consequence of the transfer of Norberto T. Montoya, Glenda M. Cabrera, married to Melvin L. Cabrera, Roberto L. Montoya, married to May Ann V. Montoya and Jun L. Montoya (Transferors) of their property in exchange for shares of stock of N.T. Montoya & Sons, Inc. cdta Document submitted show that N.T. Montoya & Sons, Inc. is a domestic Corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Five Million Pesos (P5,000,000.00) divided into Fifty Thousand (50,000) shares with a par value of One Hundred Pesos(P100.00) per share; 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 Norberto T. Montoya 3,200 P320,000.00 P80,000.00 Glenda M. Cabrera 3,200 320,000.00 80,000.00 Roberto L. Montoya 3,200 320,000.00 80,000.00 Jun L. Montoya 3,200 320,000.00 80,000.00 Melvin L. Cabrera 10 1,000.00 1,000.00 Mary Ann V. Montoya 10 1,000.00 1,000.00 Total 12,820 P1,282,000.00 P322,000.00 ====== =========== ========= that the Transferors are co-owners of 1/4 share each of a parcel of land situated in Bacolod City covered by Transfer Certificate of Title No. 176142 issued by the Registry of Deeds of Bacolod City; that a Deed of Conveyance of Real Property was executed by and between the Transferors and N.T. Montoya & Sons, Inc. whereby the Transferors transferred to the latter the abovementioned real property in full payment of their aforementioned subscription of 9,600 shares of stock of the transferee corporation valued at P960,000.00; that as a result of the above transaction, the Transferors gained control of the corporation by owning 74.88% of the total capital stock of N. T. Montoya & Son, Inc.; and that in support of the aforesaid request on the tax consequence of the said exchange transaction, you submitted to this Office, photocopies of the following documents: 1. Deed of Conveyance of Real Property; 2. Articles of Incorporation duly registered with SEC of the transferee corporation; 3. Transfer Certificate of Title No. T-176142; 4. The corresponding tax declaration of said property; 5. Certification as to the original or historical cost of the property transferred; 6. Certification by the Corporate Secretary of the transferee corporation of its authorized capital stock and the par value of the shares of stock; and 7. Certification by the Corporate Secretary of the percentage of ownership of the shares of stock by the transferor as a result of the transaction. 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 by Norberto T. Montoya, Glenda M. Cabrera, Roberto L. Montoya and Jun L. Montoya of their property in exchange for shares of stock of the transferee corporation, N.T. Montoya & Sons, Inc. considering that as a consequence of the exchange, the transferors gained control of the transferee corporation. 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 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 transferors later sell or exchange the shares of stock acquired by them in the exchange, they will 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 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 per share of each class at the date of the exchange. cdti 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 stock/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 Certificate of Stocks, 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 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. 245-00-000-109-82 dated April 04, 1982). The value shall be the fair market value which shall not be less than the par value of the stock. Finally, the certificate of stocks to be issued by N.T. Montoya & Sons, 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, N. T. Montoya & Sons, 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 in this letter are not complied with, then this ruling shall be considered null and void. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue