Transfer of Properties for Stocks - Tax-Free Exchange

December 28, 1993 BIR RULING NO. 545-93 TRANSFER OF PROPERTIES FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) & (6) (c) 441-93 545-93 Mr. Mariano C. Moreno 42 Eisenhower St., Greenhills San Juan, Metro Manila This refers to your letter dated July 20, 1993 requesting in effect, for confirmation of your opinion that no gain or loss is recognized on the transfer of real properties by the spouses Mariano C. Moreno and Sheila S. Moreno to Netcom, Inc. in exchange for its shares of stock in accordance with Revenue Memorandum Order No. 26-92, and Section 34(c)(2) and (6)(c) of the Tax Code, as amended. LexLib It is represented that Netcom, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission with an increased authorized capital stock from One Million Pesos (P1,000,000.00) to Ten Million Pesos (P10,000,000.00) divided into One Hundred Thousand (100,000) shares with a par value of One Hundred Pesos (P100.00) per share, which were subscribed as follows: A. Stockholders and their holdings on record before the increase in capital : Name No. of Shares Amt. Subscribed Mariano C. Moreno 750 P75,000.00 Sheila S. Moreno 750 75,000.00 Michael S. Moreno 350 35,000.00 Marvin S. Moreno 350 35,000.00 Sharon S. Moreno 300 30,000.00 Total 2,500 P250,000.00 ==== ========= B. Stockholders and their holdings after the increase in capital : Name No. of Shares Amt. Subscribed Mariano C. Moreno 12,000 P1,200.00 Sheila S. Moreno 12,000 1,200.00 Michael S. Moreno 350 35,000.00 Marvin S. Moreno 350 35,000.00 Sharon S. Moreno 300 30,000.00 Total 25,000 P2,500,000.00 ====== =========== that spouses Mariano C. Moreno and Sheila S. Moreno are the absolute owners of certain real properties together with all improvements existing thereon situated in the Municipalities of Makati and San Juan and Caloocan City, Metro Manila and covered by Condominium Certificate of Title No. S-1553 issued by the Register of Deeds for Metro Manila District IV, Transfer Certificates of Title Nos. 25161, 47363 issued by the Register of Deeds for Metro Manila District II and TCT No. 174624 issued by the Register of Deeds of Caloocan City; that on January 22, 1993, an Amended Deed of Assignment was executed by and between the spouses Mariano C. Moreno and Sheila S. Moreno and Netcom, Inc. whereby the transferors assign, transfer and convey unto the transferee corporation the abovementioned properties, together with all improvements thereon, valued at One Million Four Hundred Twenty Thousand Pesos (P1,420,000.00), in exchange or as payment for Fourteen Thousand Two Hundred (14,200) shares of the capital stock of Netcom, Inc. with a par value of P100.00 per share; that as a result of the above transaction, the spouses gained further control of the corporation by owning 96.36% of the total voting stock of the said corporation; and, that in support of your request, you submitted to this Office, the following documents: 1) Amended Deed of Assignment; 2) Amended Articles of Incorporation of Netcom Inc.; 3) Condominium Certificate of Title/Transfer Certificates of Title; 4) Tax Declarations; 5) Certification as to the original or historical cost of acquisition/adjusted cost basis of the properties transferred in the total amount of P2,085,000.00; (6) Certification of the fair market value or zonal value of the property involved in the exchange; 7) Certification by the corporate secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stock; 8) Certification of percentage of ownership of the shares of stock by the transferors before and after the exchange transaction; and 9) Other pertinent documents. 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, your opinion that no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by spouses Mariano C. Moreno and Sheila S. Moreno of their properties in exchange for shares of stock of the transferee corporation, Netcom, Inc., considering that after the said exchange transaction, the transferors gained further control of the transferee corporation, 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 considered. 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 property 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, 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 the properties 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 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 for 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 Netcom, 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 properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, Netcom, 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 imposed in this letter are not complied with, then this ruling shall be considered null and void. LLjur LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue