Tax Consequence of the Transfer of the Real Estate Operations and Related Assets

November 14, 1988 BIR RULING NO. 536-88 34 (c) (2) (c) 171-81 536-88 Gentlemen : This refers to your letter dated September 7, 1988 stating that as a major step toward the implementation of a well considered strategic reorganization, the stockholders of Ayala Corporation (AC) has approved the separation of AC's holding company functions from its real estate operations; that toward this objective, Ayala Land, Inc. (ALI) a 100% Ayala owned subsidiary has been registered with the Securities and Exchange Commission; that the real estate operations and related assets of AC will be conveyed and transferred in favor of ALI in exchange for shares of stock of the latter company; that through the said transfer of AC's real estate operations and related assets AC as transferor will acquire shares of the capital stock of ALI equivalent to the value of the said assets in the book of AC; and that after the transfer of the assets, AC will still own 100% of the equity of ALI. cdtech In connection therewith, you now request a ruling on the tax consequence of the transfer of the real estate operations and related assets of AC in favor of ALI in exchange for shares of stock of the latter. In reply, thereto, 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 Presidential Decree 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 fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stock received, i.e., 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. Accordingly, no gain or loss shall be recognized both to the transferor and the transferee corporation, on the transfer by AC of its real estate operations and related assets in exchange for shares of stock of ALI considering that as a result of said exchange, AC will gain control of the transferee corporation. It should be emphasized, however, that Section 34(c)(2)(c) 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 property or of the stocks involved in the exchange, the original or historical cost of the property or the stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by it in the exchange, it 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 transferor 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 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, together 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 preference 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 property 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 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 stocks; cd (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 the exchange of the capital stock issued to the transferor. 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/property received in the exchange. Moreover, the certificates of stocks issued by the new corporation are, in all probability, original issues, which are subject to the documentary stamp tax imposed by Section 188 of the Tax Code, as amended. 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. aisadc Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner