Transfer of Properties for Stocks - Tax-Free Exchange

December 22, 1993 BIR RULING NO. 505-93 TRANSFER OF PROPERTIES FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) 03-93 05-93 Nitorreda & Nasser Suite 204, Doa Margarita Bldg. J.P. Rizal cor. Cardona St. Makati, Metro Manila Attention: Leocadio S . Nitorreda This refers to your letter dated May 5, 1993 requesting for opinion as to whether the transfer of real properties by the spouses Leonardo M. Javier, Jr. and Corazon T. Javier to SMJ Holding Corporation (SMJ) in exchange for its shares of stock in accordance with Revenue Memorandum Order No. 26-92 falls within the purview of Section 34(c) (2) of the Tax Code, as amended. cdtech It is represented that SMJ Holding Corporation is a corporation duly registered and existing under and by virtue of the laws of the Republic of the Philippines, with principal office at 22-c Bulacan St., Barangay Sungad, Quezon City; that it has an authorized capital stock of P50,000,000.00 divided into 500,000 shares with a par value of P100.00 per share; that the stockholders of the corporation, with the corresponding number of shares subscribed and paid-up, are as follows: No. of Shares Amount Name Subscribed Subscribed Amount Paid Leonardo M. Javier, Jr. 75,000 7,500,000.00 1,875,000.00 Corazon T. Javier 49,997 4,999,700.00 1,249,925.00 Myrna C. Tierro 1 100.00 25.00 Jaime M. Javier 1 100.00 25.00 Gaudencio P. Pamaos 1 100.00 25.00 Total 125,000 12,500,000.00 3,125,000.00 ====== =========== ========== that the real properties, together with all the improvements existing thereon, being transferred by the spouses Leonardo M. Javier, Jr. and Corazon T. Javier to SMJ solely in exchange for the latter's shares of stock has a total fair market value of P6,901,500.00 to wit: Location Size Fair Market Value Lot 23, Blk. W-22 728 sq. m. P3,000,000.00 Diliman, Quezon City Lot 12, Blk. 1 867 sq. m. 3,901,500.00 Phase 3-C, Ayala Heights Village, Quezon City 6,901,500.00 that in addition, Mr. Leonardo M. Javier, Jr. is transferring three (3) properties registered in his name alone to SMJ in exchange also for shares of stock of the latter which properties have a total fair market value of P5,818,155.00, to wit: Location Size Fair Market Value Unit 12, Carmel Townhomes, 245.72 sq. m. P2,818,155.00 New Manila, Quezon City Lots 75 and 76, Blk. 4 76.50 sq. m. 3,000,000.00 Kingsville Subd. Bgy. 161.00 sq. m. Barangay, Antipolo, Rizal P5,818,155.00 ========= that as a result of the above exchange, Mr. Leonardo M. Javier, Jr.'s stock ownership in the corporation will constitute 66.4% of the total outstanding shares of stock entitled to vote; that Mrs. Corazon T. Javier's stock ownership in the corporation will constitute 33.5% of the total outstanding shares of stock entitled to vote; that if the stock ownership of spouses Leonardo M. Javier, Jr. and Corazon T. Javier were to be combined, these would be equivalent to 99.9% of the total outstanding capital stocks of SMJ; and that in support of your request, you submitted to this Office xerox copies of the following documents: (a) deed of transfer/exchange; (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 property transferred; (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, please be informed that pursuant to Section 34(c) (2) 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. prll Accordingly, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by spouses Leonardo M. Javier, Jr. and Corazon T. Javier of their aforementioned properties in exchange for shares of stock to SMJ Holding Corporation considering that as a result of said exchange, the transferors will gain control of the transferee corporation by owning 99.9% of its shares of stock. It should be emphasized, however, that Section 34(c) (2) of the Tax Code merely defers recognition of 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 will later sell or exchange the shares acquired by them in the exchange, they shall be subject to income tax on the gains derived from such sale or exchange, taking into consideration that the cost basis of the shares of stock 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 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) 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 was consummated a complete statement of all facts pertinent to the exchange including: 1. A description of the properties transferred, or of their interest in such properties, together with a statement of the original acquisition cost or adjusted cost 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 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: cdll 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. The abovementioned transaction between spouses Leonardo M. Javier, Jr. and Corazon T. Javier and SMJ Holding Corporation shall not be subject to the donor's tax imposed under Section 91 of the Tax Code, as amended as there is no intention to donate on the part of any of the parties. 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 parcels of land and improvements thereon are 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. Furthermore, under Section 248(d) in relation to Section 173 of the Tax Code, as amended by Executive Order No. 273, in case of failure to affix the proper documentary stamps to a document or instrument, there shall, for every violation, be imposed, in addition to the amount of documentary stamp tax required to be paid, an amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Finally, the certificate of stock to be issued by SMJ Holding 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, SMJ Holding 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. cdpr LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue