Tax Consequence of the Transfer of Several Parcels of Land Together with Improvements Held in Co-Ownership in Exchange for Shares of Stock

November 29, 1988 BIR RULING NO. 565-88 34-c 2-c 330-88 565-88 Gentlemen : This refers to your letter dated August 1, 1988 requesting a ruling on the tax consequence of the transfer by your clients, Mesdames Pilar C. Narciso, Belen L. Narciso, Asuncion L. Narciso, Concepcion L. Narciso and Salud N. Abejo married to Andres Abejo and Messrs. Vicente L. Narciso married to Maria Roque, Victor N. Alimurung married to Myrna Nepomuceno, Benjamin N. Alimurung married to Fortunata Mendoza of several parcels of land together with their corresponding improvements thereon which are held by them in co-ownership in exchange for shares of stock of NL Realty and Development Corporation. cdt It is represented that NL Realty and Development Corporation has an authorized capital stock of P20,000.00 divided into 2,000 shares with a par value of P10.00 per share; that the amount of the capital stock which has been actually subscribed is P5,000.00 and the following persons have subscribed for the number of shares and amount of the capital stock set out after their respective names: NAME NUMBER OF AMOUNT OF SHARES SUBSCRIPTION 1. Asuncion L. Narciso 75 P750.00 2. Belen L. Narciso 75 750.00 3. Pilar L. Narciso 75 750.00 4. Concepcion L. Narciso 75 750.00 5. Vicente L. Narciso 75 750.00 6. Natividad N. Alimurung 75 750.00 7. Luis L. Narciso 75 500.00 500 P5,000.00 ===== ========== that the following persons have paid on the shares of capital stock for which they have subscribed the amounts set out after their respective name: NAME AMOUNT PAID ON SUBSCRIPTION 1. Asuncion L. Narciso P750.00 2. Belen L. Narciso 750.00 3. Pilar L. Narciso 750.00 4. Concepcion L. Narciso 750.00 5. Vicente L. Narciso 750.00 6. Natividad N. Alimurung 750.00 7. Luis L. Narciso 500.00 Total P5,000.00 that the properties which your clients intend to transfer to the corporation were acquired by them through inheritance; that said properties are titled in their names where they hold an undivided interest in the following proportion: "Belen L. Narciso 5/36, Asuncion L. Narciso 5/36, Concepcion L. Narciso 5/36, Pilar L. Narciso 5/36, Vicente L. Narciso 4/36, Salud L. Narciso 4/36, Victor N. Alimurung and Benjamin N. Alimurung 4/36. The heirs of the late Luis L. Narciso hold the remaining 4/36 but the estate of said deceased is still pending partition." that the Articles of Incorporation of the corporation will be amended to reflect an increase in its authorized capital stock sufficient to cover the value of the properties to be transferred to the corporation; that the transfer of the properties will be made at the value appearing in the corresponding tax declaration of the properties; and that after the exchange not more than 5 persons will gain control of the corporation by owning 51% of the total voting power of all classes of stocks entitled to vote. 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 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 corporation of which as a result of such exchange, said person, along 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 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 transferors and the transferee corporation on the transfer by your clients, Mesdames Pilar L. Narciso, Belen L. Narciso, Asuncion L. Narciso, Concepcion L. Narciso and Salud N. Abejo married to Andres Abejo and Messrs. Vicente L. Narciso married to Maria Roque, Victor N. Alimurung married to Myrna Nepomuceno, Benjamin N. Alimurung married to Fortunata Mendoza of their real properties held by them in co-ownership in exchange for shares of stock of NL Realty and Development Corporation, considering that after the exchange of properties and as a result of said exchange, not more than five of your clients will gain control of said corporation. cdti 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 properties or of the stocks involved in the exchange, the original or historical cost of the properties or the stocks is considered. Thus, if the transferors later sell of exchange the shares of stock acquired by them in the exchange, they 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 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), 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)(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 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 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 stocks received and preference if any; 3. The number of shares of each class received; 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 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 stock and number of shares issued to the transferors in the exchange; and c. The fair market value as of the date of 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. 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 aforesaid deed. (BIR Ruling No. 245-00-000-00-102-82 dated April 6, 1982). Furthermore, the certificates of stocks issued by NL Realty & Development 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. Finally, 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. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner