BIR Ruling

May 22, 1974 Messrs. Raquiza, Esparrago Opinion Amanto, Pacificador and Ozamiz Suite Blvd., Ermita, Manila Gentlemen : This refers to your letter dated February 22, 1974 requesting a ruling on the tax consequence of the merger agreement entered into by and between Cebu Bohol Ferry Co., Inc., Cebu Ormoc Ferry, Inc., and Southern Island Shipping Corporation, and the Aboitiz Shipping Corporation. cdi It is represented that on December 3, 1973 an agreement of merger was entered into by and between Cebu Bohol Ferry Co., Inc. (hereinafter referred to as Cebu Bohol), Cebu Ormoc Ferry, Inc. (hereinafter referred to as Cebu Ormoc), and Southern Islands Shipping Corporation (hereinafter referred to as Southern Island), and the Aboitiz Shipping Corporation (hereinafter referred to as Aboitiz Shipping); that the merger is being undertaken for the improvement and streamlining of the shipping business and service of the merging corporations to the public thus placing the surviving corporation, Aboitiz Shipping in a better position to contribute to the efforts of the government towards the modernization and improvement of the shipping industry; that Cebu Bohol, Cebu Ormoc and Southern Islands, hereby convey, assign, and transfer to Aboitiz Shipping all of their business, property, assets and other assets, including cash on hand and bank deposits, receivable, investments in shares of stock fixed assets and in short the totality of all of their assets as reflected in their balance sheet as of December 31, 1973; that whatever assets which are not normally reflected in the balance sheet of the corporations, or which might have been omitted from said balance sheet through oversight, or which may have been acquired from December 31, 1973 until the effective date of the merger agreement shall be deemed included in their conveyance, assignment and transfer, that Aboitiz shipping hereby assume all of the liabilities of Cebu Bohol, Cebu Ormoc and Southern Islands as are reflected in their balance sheet together with other liabilities which may have been acquired until December 31, 1973 and the obligations and undertaking of Cebu Ormoc and Southern Islands, contractual or otherwise, expressed or implied, actual or contingent, subject however, to being able to exercise all of the defenses, rights, privileges, set-offs and counterclaims of every kind and nature which Cebu Bohol, Cebu Ormoc and Southern Islands might have; that in consideration of said conveyance, assignment, and transfer, Aboitiz agrees to issue to all stockholders whose names appear on record on the books of Cebu Bohol, Cebu Ormoc and Southern Islands as of December 31, 1973, the aggregate total of 48,595 shares to be distributed proportionately among themselves so that for every share of Cebu Bohol it will receive 0.54372 share of Aboitiz Shipping; that for every share of Southern Islands it will receive 1.91433 of Aboitiz Shipping; that as computed, fractional shares of less than one-half () be paid in cash, and fractional shares of one-half () or over shall be issued as whole shares collecting from the respective stockholders any balance due between the par value of the whole share and its fractional share; that Aboitiz Shipping shall amend its Articles of Incorporation wherein its authorized capital stock shall be increased from P3,000,000.00 divided into 30,000 shares to P10,000,000.00 divided into 100,000 shares with the par value of P100.00 each and the corresponding certificate of increase in capital stock shall be filed with the Securities and Exchange Commission; and that Cebu Bohol, Cebu Ormoc and Southern Islands, shall amend its Articles of Incorporation so that its term of existence may expire on December 31, 1973. In reply thereto, I have the honor to inform you as follows: Section 35(c)(1) and (2) of the Tax Code provide, viz: "Exchange of property "(1) General rule . Except as herein provided, upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized. "(2) Exception No gain or loss shall be recognized if in pursuance of a plan of merger or 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 or consolidation solely for the stock of another corporation, also a party to the merger consolidation. . ." To fall within the purview of the exception, however, the merger must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation, and 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. (See Section 35(c)(5)(b), Tax Code) The aforesaid merger appears to have been undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. As a consequence of the merger, no gain or loss shall be recognized both on the part of Aboitiz Shipping and Cebu Bohol, Cebu Ormoc and Southern Islands on one hand and on the part of Cebu Bohol, Cebu Ormoc and Southern Island stockholders on the other hand. However, the basis of the Aboitiz Shipping shares to be received by the Cebu Bohol, Cebu Ormoc, and Southern Islands stockholders shall be the same as the basis of the Cebu Bohol, Cebu Ormoc and Southern Islands shares they exchanged therefor; and the basis to Aboitiz Shipping of the assets of Cebu Bohol, Cebu Ormoc, and Southern Islands it will acquire in exchange for its own shares shall be the same as the basis to Cebu Bohol, Cebu Ormoc and Southern Islands of the same assets as of the time of the transfer. In this connection, the parties of 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 of reorganization must be adopted by each of the corporations parties thereto; and the adoption must be shown by the acts of its duly constituted responsible officers; and appear upon the official records of the corporation. Such 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-recognition of the gain or loss in connection with the reorganization including: (1) A copy of the plan of reorganization, together with a statement, executed under the penalties of perjury, showing in full the purposes 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. (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 received 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) missing paragraph (2) A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and 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 is substantial form shall be kept by every taxpayer who participated in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property and the amount of stock or securities and to other property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the property 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. casia Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN 1601-593-5 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."