September 9, 1987

BIR RULING NO. 274-87

35 (c) 2 (c) 210-87 274-87

Sir:
This refers to the letter dated July 13, 1987 of the Treasurer of Maray
Maray Farms, Inc. and to your letter dated July 30, 1987 requesting a ruling on the
tax consequence of the transfer by Messrs. Nestor D. de Rivera, Alfredo V.
Asuncion, Pastor B. Esguerra, Jr., Benjamin T. Madlangsacay, Eric A. Cruz and
Mrs. Josefina Ablan Mendoza of their real properties to Maray Maray Farms, Inc.
in exchange for the latter's shares of stock.
It is represented that Maray Maray Farms, Inc., a domestic corporation and
duly registered with the Securities and Exchange Commission has an authorized
capital stock of P2,500,000.00 divided into 250,000 shares with a par value of
P10.00 per share; that the following are the incorporators of the corporation with
the number of shares subscribed and paid-up viz:
Names

Nestor D. de Rivera
Alfredo V. Asuncion
Pastor B. Esguerra, Jr.
Josefina Ablan Mendoza
Benjamin T. Madlangsacay
Eric A. Cruz

No. of Shares
Subscribed
6,100
14,400
6,000
12,000
12,000
12,000

62,500
======

Amount of
Capital Stock
P 61,000.00
144,000.00
60,000.00
120,000.00
120,000.00
120,000.00

P625,000.00
=========

Amount Paid
on Subscription
P 15,250.00
36,000.00
15,000.00
30,000.00
30,000.00
30,000.00

P156,250.00
=========

that a "Deed of Exchange and Transfer" was executed on April 1, 1987 by Messrs.
Nestor D. de Rivera, Alfredo V. Asuncion, Pastor B. Esguerra, Jr., Benjamin T.
Madlangsacay, Eric A. Cruz and Mrs. Josefina Ablan Mendoza (transferors) and
the corporation (transferee) whereby the transferors transferred and conveyed to
the corporation their respective properties situated at Maramag, Bukidnon in
payment for their unpaid subscription and for additional issues of shares of capital
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stock of the corporation viz:

Names

Nestor D. de Rivera
Alfredo V. Asuncion
Pastor B. Esguerra, Jr.
Josefina Ablan Mendoza
Benjamin T. Madlangsacay
Eric A. Cruz

Unpaid
Subscription
P45,750.00
108,000.00
45,000.00
90,000.00
90,000.00
90,000.00

P468,750.00
=========

Additional
Issue
P61,000.00
144,000.00
60,000.00
120,000.00
120,000.00
120,000.00

P625,000.00
=========

TOTAL

P106,750.00
252,000.00
105,000.00
210,000.00
210,000.00
210,000.00

P1,093,750.00
==========

that as further consideration for the transfer and conveyance to the corporation of
the properties of the transferors under said "Deed of Exchange and Transfer", the
corporation issued additional shares to the transferors amounting to 31,200 shares
with a value of P312,500.00 from its unissued shares; and that after the exchange
and as a result of the exchange, the transferors gained control of the corporation by
owning more than 51% of the total voting power of all classes of stocks entitled to
vote.
adc

In reply, I have the honor to inform you that pursuant to Section 35,
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 and paid-up, 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 to each of the six (6)
transferors, Messrs. Nestor D. de Rivera, Alfredo V. Asuncion, Pastor B. Esguerra,
Jr., Benjamin T. Madlangsacay, Eric A. Cruz and Mrs. Josefina Ablan Mendoza
and the transferee corporation, Maray Maray Farms, Inc., considering that after the
exchange and as a result of the said exchange not more than five (5) of the
transferors will gain control of the transferee corporation.
It should be emphasized, however, that Section 35 (c)(2)(c) of the Tax Code
merely defers recognition of gain or loss from such transaction, for in determining
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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
stock is considered. Thus, if the transferors later sell or exchange the shares of
stock acquired by them in 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 of stock shall be the same as the original acquisition cost or adjusted
cost basis to the transferors of the properties exchange 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 35 (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 35
(c)(2)(c) of the Tax Code, as amended, they should comply with the requirements
hereunder mentioned:
(a)

(b)

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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 properties, 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 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.

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 that

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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 stocks;

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 stock/properties received in the exchange.
Moreover, pursuant to Section 245 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.
245-00-000-00-109-82 dated April 6, 1982)
After payment of the corresponding documentary stamp tax, the aforesaid
real properties may now be registered by the Register of Deeds concerned in the
name of Maray Maray Farms, Inc.

Very truly yours,

(SGD.) EUFRACIO D. SANTOS
Deputy Commissioner

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