Tax Consequence of Transfer of a Real Property with Improvements

November 4, 1988 BIR RULING NO. 524-88 34 (c) (2) (c) 421-88 524-88 Gentlemen : This refers to your letter dated July 18, 1988 requesting confirmation of your opinion that no gain or loss shall be recognized as a consequence of transfer of a real property with improvements thereon owned by Real Properties, Inc. (RPI) to Facilities Incorporated (FI) in exchange of shares of stock in the latter corporation which as a result of the exchange of former corporation gains control of the latter corporation under Section 34, paragraph (c)(2)(c) of the National Internal Revenue Code, as amended. cdtech It is represented that FI is a domestic corporation organized on June 22, 1960 with the original authorized capital stock of P50,000 divided into 5,000 shares, with a par value of P10 each; that incorporators of said corporation with their respective subscription and payment are as follows: NAME NO. OF AMOUNT AMOUNT SHARES SUBSCRIBED PAID Ricardo V. Zaragosa 250 2,500 P 1,000 Vicente Araneta, Jr. 250 2,500 1,000 Jose F.S. Bengzon, Jr. 250 2,500 1,000 Enrique A. Zabarte 250 2,500 1,000 Graciano T. Cruz 250 2,500 1,000 that as of March 10, 1988, the stockholders of record of FI with their respective subscription and payment are as follows: NAME NO. OF AMOUNT AMOUNT SHARES SUBSCRIBED PAID Vicente A.Z. Araneta 10,000 P10,000 P10,000 Irene Worrell Araneta 10,000 10,000 10,000 Francisco V. Librero 9,990 9,990 9,990 Carlo R. Magno 10,000 10,000 10,000 Samuel L. Esguerra 10,000 10,000 10,000 Real Properties, Inc. 10 10 10 TOTAL 50,000 P50,000 P50,000 that with the proposed transfer of real property to FI, FI amended its articles of incorporation to effect an increase in its capital stock from P50,000 to P1,200,000,000.00 divided into 600,000,000 preferred shares and 600,000,000 common shares; that of the common shares; the same is further subdivided into 360,000,000 common shares Class "A" and 240,000,000 common shares Class "B"; that all shares of stock has a par value of P1.00 each; that out of the 1,200,000,000.00 increase in capital stock of FI, RPI subscribed 25% of said increase which amounted to 300,000,000.00; that of this subscription P75,000,000.00 has been paid for in real property as evidenced by RPI in favor of FI; that the following are the distribution of the subscription and payment among the three classes of stocks: CLASS AMOUNT SUBSCRIBED AMOUNT PAID Common "A" P90,000,000 P22,500,000 Common "B" 60,000,000 15,000,000 Preferred 150,000,000 75,000,000 P300,000,000 P75,000,000 and that as a result of the transfer of the real property in exchange for the stocks in FI, the stockholders of FI and the number of shares to be issued and amount paid up on such shares will be approximately as follows: NAME NO. OF AMOUNT AMOUNT SHARES SUBSCRIBED PAID Vicente A.Z. Araneta 10,000 P10,000 P10,000 Irene Worrell Araneta 10,000 10,000 10,000 Francisco Librero 9,990 9,990 9,990 Carlo R. Magno 10,000 10,000 10,000 Samuel L. Esguerra 10,000 10,000 10,000 Real Properties, Inc. Common Class "A" 22,500,010 90,000,000 2,500,010 Common Class "B" 15,000,000 60,000,000 15,000,000 Preferred 37,500.000 150,000,000 37,000,000 TOTAL 75,050,000 P300,050,000 P75,050,000 In reply, 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 stock in the same transaction may be counted up to a maximum of five. cdta Accordingly, your opinion is hereby confirmed that no gain or loss shall be recognized both of the transferor corporation, Real Properties, Inc. and the transferee corporation, Facilities, Inc. and the transferee corporation, Facilities, Inc. considering that after the proposed exchange and as a result of the proposed exchange, the transferor will gain control of the transferee corporation, Facilities, Inc. 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 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 transferor later sells or exchanges the shares of stock acquired by it in exchange, it shall be subject to income tax on 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 transferor of the property exchanged therefor; and that the cost basis to the transferees of the property exchanged for stocks shall be the same as it would be in the hands of the transferor. [Section 34(c)(5)(a) and (b), Tax Code, as amended by Presidential Decree No. 1773] In this connection, you are further advised that in order that the parties to the proposed 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 transferor must file with its 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 property transferred, or of its interest in such property, with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfer; 2. The kind of stock 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 transferor; 2. A statement of the original acquisition cost or other basis of the property in the hands of the transferor and the adjusted cost basis thereof at the time of the transfer; and 3. Information with respect to the capital stock of that 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 stock and number of shares issued to the transferor in the exchange; and c. The fair market value as of the date of exchange of the capital stock issued to the transferor. In addition to the foregoing requirements, pertinent 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/property received in the 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 what is contemplated in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the aforesaid deed. (BIR Ruling No. 247-87 dated September 9, 1987) 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 stamp 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 equivalent to twenty-five percent of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Should the aforementioned proposed transaction materialize and after payment of the corresponding documentary stamp tax, the aforesaid real property may be registered by the Register of Deeds concerned in the name of Facilities, Inc. cdti Finally, the certificates of stocks to be issued by Facilities, Inc. are, in all probability, original issues. Such being the case, said original issues are subject to the documentary stamp tax imposed by Section 175 of the Tax Code. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue