BIR Ruling

December 13, 1973 Messrs. Sycip, Gorres, Velayo & Co. P. O. Box 589, Manila Attention: Mr . B . V . Abela Gentlemen : This refers to your letter dated December 6, 1973 requesting a ruling on the tax consequence of the merger between Gelmart Industries Philippines, Inc. (hereinafter referred to as GIP) and Interstretch Manufacturing Corporation (Hereinafter referred to as Interstretch.) It is represented that GIP is a domestic corporation incorporated under Philippine Laws in 1952; that except for a nominal number of directors' qualifying shares, all its outstanding capital stock, consisting of 900 shares of voting common stock are owned by Gelmart Industries, Inc. (hereinafter referred to as Gelmart US), a U.S. corporation; that it is engaged in the manufacture of gloves, brassieres and infants' wear at its plant along South Superhighway, Paraaque, Rizal; that Interstretch is likewise a domestic corporation incorporated under Philippines laws in May, 1972; that Gelmart US and Colonial Elastic Inc., an unrelated U.S. corporation, used to own one-half each of Interstretch's outstanding capital stock consisting of 67,400 shares of voting common stock; that in October 1973, Gelmart US bought all the shares owned by Colonial Elastic, Inc. and, at present, except for directors' qualifying shares, all of Interstretch's outstanding shares are owned by Gelmart US: that Interstretch is engaged in the manufacture of elastic at its plant in Paraaque, Rizal, which are supplied to and used by GIP as components in its export products; that all the outstanding stock of both GIP and Interstretch are now owned by Gelmart US and, as such, it would be to its advantage if GIP And Interstretch are merged, with GIP as the surviving corporation, as it would reduce their administrative burden and costs; and that for purposes of carrying out the merger, effective as of November 15, 1973, the respective Board of Directors and stockholders of GIP and Interstretch have already adopted and approved the corresponding resolutions authorizing the merger and indicating the terms under which the merger will be carried out. The plan of merger to be undertaken by GIP and Interstretch will be as follows: cdtech 1. Interstretch will transfer to GIP all its assets and liabilities as of November 15, 1973, and GIP will issue to the stockholders of Interstretch such number of unissued shares of its capital stock with par value equivalent to the book value as of November 15, 1973 of the net assets transferred to it by Interstretch. 2. GIP will assume all the assets as well as liabilities and obligations of Interstretch as of November 15, 1973. 3. As a consequence of the merger, Interstretch will dissolve as of November 15, 1973 and cease to exist as an independent entity, and will thereafter become a division of GIP. It is also represented that: 1. The book value of the total assets of Interstretch as of November 15, 1973 was P7,621,251.15, while the total liabilities amounted to P666,433.35; hence, its net assets have a book value of P6,954,817.80. 2. GIP still has 194,508 common Class A unissued shares with a par value of P100 per share, which is more than sufficient to cover the book value of the net assets of Interstretch that will be transferred to it. 3. The total number of shares to be issued by GIP in favor of the stockholders of Interstretch pursuant to the plan of merger will be 69,548 common Class A shares with a total par value P6,954,800, plus the amount of P17.80 to avoid the issuance of fractional share, corresponding to the book value of the net assets of Interstretch that will be transferred to GIP. In reply thereto, I have the honor to inform you that Section 35(c)(2) of the Tax Code provides, viz: "(a) Exceptions . No gain or loss shall be recognized if in pursuance of a plan of merger of consolidation (a) a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation, (b) a shareholder exchanges stock in a corporation which is a party to the merger of consolidation. . . ." aisadc However, to fall within the purview of the above exception, the merger must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. In determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit. (Sec. 35(c) (5) (b), Tax Code). From the overall perspective of the merger between GIP and Interstretch, the merger appears to have a bona fide business purpose. Accordingly, as a consequence of the merger, no gain or loss shall be recognized to either GIP or Interstretch or their stockholders. However, the basis of the GIP shares to be received by the Interstretch stockholders shall be the same as the basis of the Interstretch shares they exchanged therefor; and the basis to GIP of the assets of Interstretch it will acquire in exchange for its own shares shall be the same as the basis to Interstretch of the same assets as of the time of the transfer. In this connection, the parties to the merger herein mentioned must keep records of the following, and must file with their income tax returns information on the following: (a) The plan or reorganization adopted by each of the corporations parties thereto; and the adoption being shown by the acts of its duly constituted responsible officers, and appear upon the official records of the corporation. Each corporation, a party to a reorganization, shall file as a part of its return for its taxable year within which the reorganization occurred a complete statement of all facts pertinent to the non-reorganization, including: (1) A copy of the plan of reorganization, together with a statement, executed under the penalties of perjury, showing in full the purpose thereof and in detail all transactions incident to, or pursuant to, the plan. (2) A complete statement of the cost or other basis of all property, including all stock or securities, transferred incident to the plan. (3) A statement of the amount of stock or securities and other property or money received from the exchange, including a statement of all distributions or other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value thereof at the date of the exchange. acd (4) A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. (b) Every taxpayer, other than a corporation a party to the reorganization, who receives stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the nonrecognition of gain or loss upon such exchange including: (1) A statement of the cost or other basis of the stock or securities transferred in the exchange, and (2) A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities to which property received is subject. The amount of each kind of stock or securities and other property (other than liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of the exchange. (c) Permanent records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject), in order to facilitate the determination of gain or loss from a subsequent disposition of such stock or securities and other property received from the exchange. (par. 9803-B, P-H 1963 ed., p. 9611) In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporations participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received as a consequence of the merger. cdt Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5