BIR Ruling

July 20, 1976 Messrs. Britanico, Gangan & Associates 2nd Floor, Front Page Building Ermita, Manila Gentlemen : This refers to your letter dated July 19, 1974 which supplements the letter dated July 9, 1974 of Messrs. Joaquin Cunanan & Co. requesting a ruling on the tax consequences of the proposed merger between DMG, Inc. and Mabco, Inc. cdta It is represented that DMG, Inc. was organized and incorporated with the main purpose, viz: "to manufacture, assemble, produce, purchase, import, or otherwise acquire, and to distribute, sell at wholesale or retail, export and otherwise dispose of and deal in, trucks, cars, engines, agricultural machinery, industrial machinery, refrigeration equipment, air conditioning units, dry cell batteries, and other goods, wires and merchandise of every class and description";that the main purpose of Mabco, Inc. is "to manufacture, assemble, produce, purchase, import or otherwise acquire, and to distribute, sell at wholesale or retail, lease, export and otherwise dispose of and deal in goods, cars, and other means of transportation, machines, wares and merchandise of every class and description; that the merging corporations were incorporated in substantially the same lines of business activities and are in fact affiliated with each other for the reason that the substantial portion of the assets of Mabco, Inc. consisted of the shares of stocks of DMG, Inc. and that the principal stockholders and officers of Mabco, Inc. are also the principal stockholders and officers of DMG, Inc.;that Mabco, Inc. and DMG, Inc. deemed it advisable that all the assets, properties rights, privileges, franchises, choses in action, goodwill and other tangible as well as intangible properties of whatever kind and wheresoever located standing in the name, owned or possessed by both merging corporation be merged, consolidated and aggregated in order to bring about greater administrative and managerial efficiency, economy and more favorable asset build up and expansion; that DMG, Inc. has an authorized capital stock of P60,000,000.00 and outstanding capital of P21,114,350.00 with a par value of P100 per share; that Mabco, Inc. has an authorized capital stock of P1,000,000.00, an outstanding capital of P374,300.00 with a par value of P100.00; that Mabco, Inc. shall transfer and convey unto DMG, Inc. and the latter shall acquire all of Mabco, Inc. undertakings, business interests, assets, goodwill, rights, privileges, franchises, chooses in action, patents, copyrights, trade names, trade secrets and formulas, properties whether real or personal or mixed and all other tangible as well as intangible properties provided that all rights of creditors and all liens upon property of Mabco, Inc. shall be preserved unimpaired: that among the assets of Mabco, Inc. to be transferred to DMG, Inc. are investment in shares of stock of the latter aggregating 25,065 shares; that DMG, Inc. shall issue or cause to be issued shares of its capital stock at an aggregate appraised value equal to the appraised value of the total outstanding capital stock of Mabco, Inc.;that each stockholder of record of Mabco, Inc. shall be entitled to receive one fully paid and non-assessable share of the capital stock of DMG, Inc. in exchange for share of the capital stock of Mabco, Inc. then held by him upon surrender of the certificate therefore; that DMG, Inc. shall assume all debts, liabilities, obligation, commitments as well as claim against Mabco, Inc. and all such liabilities, obligations, commitments, and adverse claims shall attach to DMG, Inc. and may be enforced against it in the same manner and to the same extent as if they were incurred or contracted by DMG, Inc. that DMG, Inc. shall take all the necessary steps of increasing its authorized capital stock, if needed, in order to accommodate all the shares to be issued to the stockholders of Mabco, Inc. or that the investment of Mabco, Inc. in shares of stock of DMG, Inc. aggregating 25,065 shares which have become treasury stocks are being contemplated to be reissued to the stockholders of Mabco, Inc. as part of the full exchange value of their respective stockholdings in Mabco, Inc. and that any deficiency thereof shall be covered by new issues of the capital stock of DMG, Inc. In reply, I have the honor to inform you that the reorganization under the plan described above is a merger within the contemplation of Section 35(c)(2) and (5)(b) of the Tax Code and consequently, the following rules provided for in the provisions of law hereunder indicated shall be applied: 1. The transfer by Mabco, Inc. of all of its undertakings, business interests, assets, goodwill, rights, privileges franchises, choses in action, patents, copyrights, trade names, trade secrets and formulas, properties whether real or personal or mixed and all other tangible as well as intangible properties provided that all rights of creditors and all liens upon property of Mabco, Inc. shall be preserved unimpaired in exchange for shares of stock of DMG, Inc. shall not give rise to the recognition of gain or loss, pursuant to Section 35(c)(2) of the Tax Code. 2. No gain or loss will be recognized to Mabco, Inc. upon its distribution of DMG, Inc. stock to its stockholders in complete redemption of their stock under Section 35(c)(2) of the Tax Codes. 3. No gain or loss will be recognized to Mabco, Inc. stockholders upon the exchange of their Mabco, Inc. stocks solely for DMG, Inc. stocks under Section 35(c)(2) of the Tax Code. 4. The basis of DMG, Inc. stocks received by Mabco, Inc. shall be the same as the basis of the Mabco, Inc. assets exchanged therefor, in accordance with Section 35(c)(4)(a);the basis of the assets of Mabco, Inc. in the hands of DMG, Inc. shall be the same as it would be in the hands of Mabco, Inc. in accordance with Section 35(c)(4)(b). 5. The basis of DMG, Inc. stocks received by stockholders Mabco, Inc. shall be the same as the basis of their Mabco, Inc. stocks which they exchanged for the former. 6. The foregoing transactions involving the issuance and exchange of shares of stockholders are not subject to stock transaction tax (Sec. 195-B, Tax Code, as amended) 7. The abovementioned transactions shall not be subject to the gift tax as there is no intention to donate on the part of any of the parties. aisa dc However, in order that the above described reorganization can be considered a merger under Section 35(c)(2) of the Tax Code, the parties to the merger should comply with the following requirements: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation a party to a reorganization, shall file, as part of its return for the taxable year with in which the reorganization occurred, a complete statement of all facts pertinent to the non-recognition of 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 transaction 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 non-recognition 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 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 participate 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. 9802-B, P-H 1963 ed.,p. 9611) cdi Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3