Tax Consequence of the Transfer of Parcels of Land in Exchange for Shares of Stock

December 13, 1988 BIR RULING NO. 576-88 34-c-2-c 330-88 576-88 S i r : This refers to your letter dated November 7, 1988 requesting a ruling on the tax consequence of the transfer by your client, Mr. Antonio R. Alunan of four (4) parcels of land in favor of Tafec, Inc. in exchange for its shares of stock. It is represented that your client together with four (4) other incorporators set up the Tafec, Inc.;that the corporation has a capital stock of seven million (P7,000,000.00) pesos, divided into seventy thousand (70,000) shares with a par value of P100.00 per share; that the amount of capital stock actually subscribed is P1,962,400.00; representing 19,624 shares subscribed by the incorporators as follows: Name No. of Shares Amount Subscribed Antonio R. Alunan 19,620 P1,962,000.00 Josefa A. Ramos 1 100.00 Ma. Socorro R. Sarmiento 1 100.00 Ma. Josefina A. Ramos 1 100.00 Enrique A. Ramos, Jr. 1 100.00 19,624 P1,962,400.00 ===== =========== that out of the total subscriptions of P1,962,400.00 your client has subscribed to P1,962,000.00; and that your client's total subscription has been paid through the assignment of the aforementioned four (1) parcels of land. 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, 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 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 Mr. Antonio R. Alunan of his real properties in payment of his subscription of the shares of stock of Tafec, Inc.,considering that after the exchange of properties and as a result of said exchange, he will gain control of said 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 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 transferor later sells or exchanges the shares of stocks acquired by him in the exchange, he 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 stocks shall be the same as the original acquisition cost or adjusted cost basis to the transferor 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 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 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: cd (a) The transferor must file with his 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 his 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 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 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 prior to and immediately after the exchange, with a complete description of each class of stocks; 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, 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 Tafec, 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. 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. Finally, after the payment of the corresponding documentary stamp tax, the aforementioned real property may now be registered by the Register of Deeds concerned in the name of Tafec, Inc. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner