Tax Consequence of the Transfer a of a Parcel of Land for the Shares of Stock

December 27, 1988 BIR RULING NO. 599-88 34 (c) (2) (c) 576-88 599-88 S i r : This refers to your letter dated October 6, 1988 requesting a ruling on the tax consequence of the transfer by Mr. Raul Victor Montesa of a parcel of land in favor of Aesthetic Design Contractors, Inc. in exchange for its shares of stock. It is represented that Aesthetic Design Contractors, Inc., is a domestic corporation duly registered with the Securities and Exchange Commission; that it has an authorized capital stock of P500,000 divided into 10,000 common shares with a par value of P50.00 per share; that the following are the stockholders of the corporation with the number of shares subscribed and paid-up viz: cdt Amount of Amount No. of Shares Capital Stock Paid on Name Subscribed Subscribed Subscription Mark Naldo Montesa 875 P43,750.00 P11,000.00 Raul Victor Naldo Montesa 875 43,750.00 11,000.00 Timothy Hugh Fisher 675 31,250.00 31,250.00 Vicente Barrios 124 6,200.00 1,550.00 Francia B. Naldo 1 50.00 50.00 2,500 P125,000.00 P54,850.00 ==== ========== ========== that Mr. Raul Victor Naldo Montesa is the owner of one (1) parcel of land located at BF Homes, Barrio Almanza, Las Pias, Metro Manila and covered by TCT No. T-4999 of the Registry of Deeds of Paraaque; that on September 28, 1988, a Deed of Conveyance was executed by Mr. Raul Victor Naldo Montesa in favor of Aesthetic Design Contractors, Inc. whereby Mr. Raul Victor Naldo Montesa transferred to the said corporation a parcel of land in exchange for 1,477 shares of stock with a par value of P198,850.00; that after the said transfer, the stockholdings of the stockholders are as follows: BEFORE SEPT. 26, 1988 AFTER SEPT. 26, 198 SUBS- PAID SUBS- PAID CRIBED UP CRIBED UP Raul Victor Montesa P43,750.00 P11,000.00 P84,850.00 P84,850.00 Marc Victor Montesa 43,750.00 11,000.00 43,700.00 43,750.00 Timothy H. Fisher 31,250.00 31,250.00 31,250.00 31,250.00 Vicente Barrios, Jr. 6,200.00 1,550.00 6,200.00 1,550.00 Francia Cape Naldo 50.00 50.00 50.00 50.00 and that after the exchange and as a result of the exchange, the transferor gained control of the corporation by owning more than 51% of 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 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 stock received, i.e., subscribed, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only these 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. Raul Victor Montesa of property in exchange for shares of stock of the corporation considering that after the exchange of property and as a result of the said exchange the transferor will gain control of the said corporation. cdtech 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 shares of stock 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 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 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. (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 property 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 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 stock; b. The classes of stocks 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 properties (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. 245-00-000-00-109-82 dated April 6, 1982) Furthermore, the certificates of stocks issued by Aesthetic Design Contractors, 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 aforementioned real property may now be registered by the Register of Deeds concerned in the name of Aesthetic Design Contractors, Inc. cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner