March 29, 2012

BIR RULING NO. 228-12

RMR 01-01; Section 40 (C) (2) (6) (c) 1997

NIRC

Corbro Development Corporation

UM Seno & Burgos Streets, Barangay Alang-Alang
Mandaue City, Cebu

Attention: Atty. Licinius M. Abadiano

Gentlemen :

This refers to your letter dated November 17, 2009 requesting for a ruling that no
gain or loss shall be recognized on the transfer by Spouses Zoilo M. Cortes, Jr. (TIN
143-406-590-000) and Editha F. Cortes (TIN 130-738-883-000 and hereinafter referred
to as the Assignors) of their real properties including improvements therein to Corbro
Development Corporation (Corbro) in exchange for the latter's shares of stock in
accordance with Revenue Regulations (RR) No. 18-2001 and falling under Section 40
(C) (2) and (6) (C) of the Tax Code of 1997, as amended. HCTEDa

Documents submitted show that Corbro is a newly incorporated domestic

corporation duly registered with the Securities and Exchange Commission (SEC) with
SEC Company Registration No. CS200931408 dated November 4, 2009; that Corbro
has an authorized capital stock of Forty Million Pesos (P40,000,000.00) divided into
Four Hundred Thousand (400,000) shares with a par value of One Hundred Pesos
(P100.00) per share; that its incorporators with their corresponding shares subscribed
and paid-up are as follows:
No. of Amount Subscribed Amount Paid
Name Shares (in Pesos) (in Pesos)

Zoilo M. Cortes, Jr. 49,600 4,960,000.00 2,200,521.67

Editha F. Cortes 49,600 4,960,000.00 2,200,521.66
Kristian F. Cortes 200 20,000.00 5,000.00
Jonathan Carlo F. Cortes 200 20,000.00 5,000.00
Zoilo III F. Cortes 200 20,000.00 5,000.00
Anton F. Cortes 200 20,000.00 5,000.00
–––––– –––––––––––– ––––––––––––
Total 100,000 10,000,000.00 4,421,043.33
====== =========== ===========
* The amount of P478.35 paid in cash each by Zoilo Jr. and Editha Cortes are not re ected
in the above matrix since the property contemplated in tax-free exchanges excludes cash.
(No. IV.1 of Revenue Memorandum Ruling No. 01-01 dated November 29, 2001)
that the Assignors are the registered owners of the land and improvements, described
as follows:
Type of CCT No./TCT No./ Fair Market Value Historical Cost
Property Tax Declaration (in Php) (in Php)
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 (TD) No.

Condominium Unit 27768/E-023-00618 805,600.00 0.00

Land 21747/2006-001-02975 5,406,000.00 2,500.00
Land 34975/2006-013-02208 5,107,500.00 700,000.00
Land 52256/2006-014-01736 990,000.00 362,637.00
Land 52257/2006-014-01735 375,000.00 137,363.00
Land 39155/2006-008-00122 1,641,500.00 100,000.00
Building 2006-006-00262 141,790.00 0.00
Building 2006-016-02171 1,344,460.00 0.00
Building 2006-001-02979 491,760.00 0.00
Building 2006-013-02667 868,740.00 540,640.00
Building 2006-013-02668 496,810.00 232,000.00
–––––––––––– –––––––––––
Total 17,669,160.00 2,075,140.00
=========== ==========
that on September 23, 2009, a Deed of Assignment was executed by the Assignors in
favor of Corbro, whereby the former transferred to the latter the title and ownership
over their above-described properties in exchange for and as payment of their
subscriptions, to wit:
No. of Shares
Name
Subscribed

Zoilo M. Cortes, Jr. 49,600

Editha F. Cortes 49,600
––––––
Total 99,200
=====
and that as a result of the above transfer, the Assignors gained control of Corbro by
owning 98.21% of the total voting stocks of the said corporation.
In reply thereto, please be informed that pursuant to Section 40 (C) (2) and (6)
(c) of the Tax Code of 1997, as amended, 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
stocks received i.e., total subscribed by the 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, no gain or loss shall be recognized on the transfer by Spouses Zoilo
M. Cortes, Jr. and Editha F. Cortes of their properties in exchange for shares of stock of
the transferee corporation, Corbro, considering that as a consequence of the exchange,
they gained control of the transferee corporation by owning more than 98.21% of its
total voting stocks.
While it appears that TCT Nos. 52256 and 52257 are the exclusive properties of
Zoilo M. Cortes, Jr., the Deed of Assignment, however, would show that the spouses
equally received shares of stock in exchange for the properties transferred, and as such
should be subject to donor's tax imposed under Section 98 of the Tax Code of 1997, as
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 amended. ESCTaA

Furthermore, the corresponding shares allocated to each of the properties

transferred and the substituted bases thereof are as follows:
Name of Type of No. of Shares Substituted
Transferor/s Property Allocated Basis
Zoilo M. Cortes, Jr. Condominium Unit 2,261 0.00
Land 15,175 1,250.00
Land 14,338 350,000.00
Land 2,779 181,318.50
Land 1,053 68,681.50
Land 4,608 50,000.00
Building 398 0.00
Building 3,774 0.00
Building 1,380 0.00
Building 2,439 270,320.00
Building 1,395 116,000.00
–––––– –––––––––––
Sub-Total 49,600 1,037,570.00
–––––– –––––––––––
Editha F. Cortes Condominium Unit 2,261 0.00
Land 15,175 1,250.00
Land 14,338 350,000.00
Land 2,779 181,318.50
Land 1,053 68,681.50
Land 4,608 50,000.00
Building 398 0.00
Building 3,774 0.00
Building 1,380 0.00
Building 2,439 270,320.00
Building 1,395 116,000.00
–––––– –––––––––––
Sub-Total 49,600 1,037,570.00
–––––– –––––––––––
Grand Total 99,200 2,075,140.00
====== ==========
It should be emphasized, then that Section 40 (C) (2) and (6) (c) of the Tax Code
of 1997 merely defers recognition of the gain or loss from such transaction, for in
determining the gain or loss from a subsequent transaction of the real properties or of
the stocks involved in the exchange, the original or historical cost of the properties or
stocks is considered. Thus, if any of the Assignors/Assignee later sell or exchange, they
shall be subject to income tax/capital gains tax, as the case may be, on the gains they
derived from such sale or exchange, taking into consideration that the cost basis of the
shares/real properties shall be the same as the original acquisition cost or adjudged
cost basis to the transferee 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. [Sec. 40 (C) (5) (a) and (b) of the Tax Code of
1997]
It is to be noted that under RR 10-2011 dated July 1, 2011, the exchange of
goods or properties, including the real estate properties used in business or held for
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 sale or for lease by the transferor for shares of stock, whether resulting in corporate
control or not is subject to value-added tax (VAT). In the herein case, the transfer of
TCT No. 34975 together with the commercial building and warehouse existing thereon,
the restaurant building on Lot 246-B-2 located at A.C. Cortes and Plaridel Sts.,
Cambaro, Mandaue City and apartment building on Lot 431-B at Mabini St., Looc,
Mandaue City by Sps. Cortes to Corbro is subject to VAT because the aforesaid
properties are held by the Assignors primarily for lease in the ordinary course of
business.
Moreover, you are further advised that in order that the parties to the exchange
transaction can avail of the non-recognition of gains provided for in Section 40 (C) (2)
and (6) (c) of the Tax Code of 1997, they should comply with the requirements
hereunder:
A. The transferors must le 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 property they transferred, or of their interest in
such property, with a statement of the original acquisition
cost/adjusted cost basis or other basis thereof at the time of
the transfer;
2. The kinds 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 the property received from the
transferors;
2. A statement of the original acquisition cost or other basis of the
property 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.DcITHE

In addition to the foregoing requirements, the parties shall enclose with their
respective income tax returns for the taxable year in which the tax-free exchange
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 occurred a copy of the request for ruling led with, and the corresponding ruling issued
by the Bureau of Internal Revenue, both duly stamped received by the appropriate of ce
of the Bureau of Internal Revenue. Such persons shall include as a note to their
respective audited nancial statements for the taxable year in which the exchange
occurred a statement to the effect that they hold such assets/shares acquired in a tax
free exchange and the year in which such exchange occurred, and in the taxable years
until the subject properties are subsequently transferred to another transferee.
The parties shall, pursuant to Section 58 (E) of the Tax Code of 1997, also cause
the Register of Deeds to annotate on the Transfer Certi cates of Title and/or the
Corporate Secretary to annotate at the back of the Certi cates 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; provided however, that any violation by the Register of
Deeds of this condition shall be penalized under Section 269 of the Code. It is further
required that within ninety (90) days from receipt of this ruling, the parties to the
transaction must submit to the Law Division, Bureau of Internal Revenue, a certi ed true
copy/ies by the Register of Deeds or Corporate Secretary, as the case may be, of duly
annotated Transfer Certi cates of Stock, in respect of the transferred properties and
shares of stock of transferee corporation.
The fair market value and the zonal valuation as stated above shall be subject to
verification by the RDO concerned.
Pursuant to Section 196 of the Tax Code of 1997, as amended, a conveyance or
deed whereby land is assigned or transferred to another person is subject to
documentary stamp tax based on the consideration or value received or contracted to
be paid for such realty or on its fair market value determined in accordance with
Section 6 (E) of the same Code, whichever is higher. However, under Republic Act (RA)
No. 9243 which took effect on March 20, 2004, transfer of property pursuant to Section
40 (C) (2) of the 1997 Tax Code, as amended, is now exempt from the payment of
documentary stamp tax (DST) under Section 196 of the Tax Code of 1997. Accordingly,
the transfer by the Assignors of their real properties to Corbro, as in this case, is not
subject to DST under said section.
Finally, the shares to be issued by Corbro are original issues subject to the
documentary stamp tax imposed by Section 175 (now Section 174) of the Tax Code of
1997, as amended by RA No. 9243, which shall attach upon acceptance by the
corporation of the stockholder's subscription regardless of the actual delivery of the
certificates of stock.
This Of ce reiterates that the conveyance by Zoilo M. Cortes, Jr. to Editha F.
Cortes of his share in TCT Nos. 52256 and 52257 is subject to donor's tax pursuant to
Section 98 of the Tax Code of 1997, as amended.
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be ascertained 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 as null and void.HCETDS

Very truly yours,

(SGD.) KIM S. JACINTO-HENARES

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 Commissioner of Internal Revenue

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