Transfer of Properties for Stocks - Tax-Free Exchange

December 23, 1993 BIR RULING NO. 512-93 TRANSFER OF PROPERTIES FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) (6) (c) 227-93 512-93 Atty. Rolando P. Nonato Cebu Business and Investments Consultancy Ground Floor, Martinez Building Escario cor. Molave Streets Cebu City This refers to your letter dated September 8, 1993 requesting in effect, for a ruling that no gain or loss is recognized on the transfer of real properties by spouses Hugo C. Streegan, Jr. and Gorgonia M. Streegan in favor of Pacific Land Holdings Corporation in exchange for its shares of stock pursuant to Section 34(c) (2) and (6)(c) of the Tax Code, as amended. cdta Documents submitted show that Pacific Land Holdings Corporation is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Ten Million Pesos (P10,000,000.00) divided into Ten Thousand (10,000) shares with a par value of One Thousand Pesos (P1,000.00) per share; that the incorporators of the corporation with the corresponding number of shares subscribed and paid-up are as follows: No. of Amount Name Shares Subscribed Amount Paid Alice S. Cruz 500 P500,000.00 P125,000.00 Eileen S. Domingo 500 500,000.00 125,000.00 Myriam Bernadette S. Montenegro 500 500,000.00 125,000.00 Marie Doreen S. Aboitiz 500 500,000.00 125,000.00 Total 2,500 500,000.00 P625,000.00 ==== ========= ========= that the spouses Hugo C. Streegan, Jr. and Gorgonia M. Streegan are the registered owners of three (3) parcels of land covered by Transfer Certificates of Title Nos. 18902, 18901 and 15784 issued by the Register of Deeds of Lapu-lapu City; that on September 7, 1993, a Deed of Assignment was executed by and between the spouses Hugo C. Streegan Jr. and Gorgonia M. Streegan and the Pacific Land Holdings Corporation whereby the former transferred to the latter the abovementioned realty in exchange for 2,604 shares of capital stock of Pacific Land Holdings Corporation with a par value of P1,000 each; that as a result of the above transaction, the spouses gained control of the corporation by owning 51.02% of the total voting stocks of the said corporation as follows: No. of Amount Name Shares Subscribed Amount Paid Hugo C. Streegan 1,302 P1,302,000.00 P1,302,000.00 Gorgonia M. Streegan 1,302 1,302,000.00 1,302,000.00 Alice S. Cruz 500 Aileen S. Domingo 500 500,000.00 125,000.00 Myriam Bernadette S. Montenegro 500 500,000.00 125,000.00 Marie Doreen S. Aboitiz 500 500,000.00 125,000.00 Ma. Charles M. Streegan 500 500,000.00 125,000.00 Total 5,104 P5,104,000.00 P3,229,000.00 ===== =========== =========== 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 Pacific Land Holdings Corporation; 3. Transfer of Certificates of Title; 4. Tax Declarations; 5. Certification of the original or historical cost of acquisition of properties: (P298,519.50); 6. Certification of Zonal Value of the properties; and 7. Certification of its authorized capitalization and of ownership of stocks of transferors after the transfer of properties. 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. cdti Accordingly, your opinion that no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer of spouses Hugo C. Streegan, Jr. and Gorgonia M. Streegan's properties in exchange for shares of stock of the transferee corporation, Pacific Land Holdings Corporation considering that as a consequence of the exchange, the transferors-spouses gained control of the transferee corporation, by owning 51.02% of its total voting stocks, is hereby confirmed. 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 determined. 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 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 properties transferred, or of their 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 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 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 Pacific Land Holdings 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, Pacific Land Holdings 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