Transfer of Properties for Stocks - Tax-Free Exchange

December 29, 1993 BIR RULING NO. 547-93 TRANSFER OF PROPERTIES FOR STOCKS TAX-FREE EXCHANGE 34 (c) (2) & (6) (c) 321-93 547-93 De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Ground Floor Greenbelt Mansion Perea St., Legaspi Village Makati, Metro Manila Attention: Atty . Raul G . Gerodias This refers to your letter dated July 16, 1993 requesting in effect for confirmation of your opinion that no gain or loss is recognized in the transfer of properties by Mauro M. Castro and Virginia B. Castro (Spouses for brevity) to Vega Basic Concepts, Inc. (Vega for brevity), in exchange for the latter's shares of stock in accordance with Revenue Memorandum Order No. 26-92, and falling under Section 34(c)(2) and (6)(c) of the Tax Code, as amended. cdtech It is represented that Vega is a domestic corporation duly registered with the Securities and Exchange Commission with an authorized capital stock of Thirty Million pesos (P30,000,000.00) divided into Three Hundred Thousand (300,000) shares with a par value of One Hundred Pesos (P100.00) per share, of which Seventy-Five Thousand (75,000) shares were subscribed and paid as follows: No. of Amt. Name Shares Subscribed Amt. Paid Mauro M. Castro 22,500 P2,250,000.00 P500,000.00 Virginia B. Castro 22,500 2,250,000.00 500,000.00 Jose Gerardo B. Castro 10,000 1,000,000.00 500,000.00 Maria Victoria B. Castro 10,000 1,000,000.00 500,000.00 Carmencia Maura B. Castro-Herrera 10,000 1,000,000.00 500,000.00 Total 75,000 P7,500,000.00 P2,500,000.00 ====== =========== =========== that out of the spouses' subscriptions in the aggregate amount of P4,500,000.00 (45,000 shares), only P1,000,000.00 (10,000 shares) have been paid; that the spouses desire to fully pay their unpaid subscription in the total amount of P3,500,000.00 and to further increase their control over the corporation by acquiring additional 142,290 shares valued at P14,229,000.00; that in order to achieve these objectives, the spouses proceeded to transfer to the corporation their three (3) parcels of land located in Paraaque and Quezon City, Metro Manila, covered by Transfer Certificates of Title Nos. 30215, 30216 and 86802 issued by the Register of Deeds of Paraaque and Quezon City, respectively; that as a result of the aforesaid transfer of properties as payment for unpaid subscriptions and in exchange for additional shares of stock of the corporation, the spouses, who already owned more than 51% of the outstanding capital stock of the corporation, shall gain further control of the same; that after the proposed exchange, the capital structure of the corporation shall be: Amt. Name Subscribed % of Total Amt. Paid Mauro M. Castro P9,364,500.00 86.20 P9,364,500.00 Virginia B. Castro 9,364,500.00 9,364,500.00 Jose Gerardo B. Castro 1,000,000.00 4.60 500,000.00 Maria Victoria B. Castro 1,000,000.00 4.60 500,000.00 Carmencia Maura B. Castro-Herrera 1,000,000.00 4.60 500,000.00 Total P21,729,000.00 100.00 P20,229,000.00 =========== ====== =========== that in support of your request, you submitted to this Office photocopies of the following documents: a) Deed of Exchange; b) Articles of Incorporation of Vega Basic Concepts, Inc.; c) Copy of the Transfer Certificates of Title; d) Copy of the corresponding Tax Declarations; e) Certification as to the original or historical cost of the properties transferred; f) Certification of the fair market value of the properties and appraisal report; g) Certification by the Corporate Secretary of the transferee corporation of its authorized capitalization and the par value of the shares of stock, and the percentage of ownership of the shares of stock of the transferors before and after the exchange transaction. 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 to the effect that no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by Mauro M. Castro and Virginia B. Castro of their properties in exchange for shares of stock of the transferee corporation, Vega Basic Concepts, Inc., considering that after the said exchange transactions and as a result of the said exchange transactions, the Spouses gained further control of the transferee corporation by owning 86.20% of the 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 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 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]. llcd 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 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 Vega Basic Concepts, 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, Vega Basic Concepts, 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. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue