BIR Ruling

January 6, 1975 GF Equity, Inc. 4th Floor, Doa Narcisa Bldg. 8751 Paseo de Roxas Makati, Rizal Attention: Mr . Leonardo C . Dioko Vice President/Comptroller Gentlemen : This refers to your letter dated September 24, 1974, requesting for a ruling on a query stated as follows: "Corporation A is an investment and management company while Corporation B is a firm engaged in overseas shipping. Corporation A owns all the capital stock of Corporation B with nominal shares being held by Corporation B's directors. Over the years, Corporation B has been incurring losses so that its accumulated deficit is now more than its paid-in capital. It, therefore, has a negative stockholders' equity, its liabilities being more than the book value of its assets. Corporation A, on the other hand, is in sound financial condition. cdt "As the sole owner of Corporation B, Corporation A would not want to dissolve Corporation B by shortening its life to September 30, 1974. At this time, the accounts would appear as follows: In the books of Corporation A : Investment in Corporation B P500,000 In the books of Corporation B : Assets P1,500,000 Liabilities P2,000,000 Stockholders' Equity (P500,000) "As of September 30, 1974, Corporation A, in lieu of its investment in Corporation B will assume all the assets and liabilities of Corporation B. Corporation B will thereafter cease to exist, its operations being taken over by Corporation A. Corporation B's books will be closed as of September 30, 1974 and an income tax return will be filed as of that date, based on an audit by an independent certified public accountant. "Based on the foregoing facts, we would like to have your confirmation that the assumption by Corporation A of all the assets and liabilities of Corporation B will not result in any tax liability. We would also like to request your ruling as to the basis for Corporation A in taking up (or recording) in its books the assets and liabilities of Corporation B. Corporation A can either record the assets at the value of the liabilities and write off its investment or it can record the assets and liabilities at book values and realized a loss on investment of P1,000,000." In reply, I have the honor to inform you that under Section 35(c)(5)(b) of the Tax Code: "(b) The term 'merger or 'consolidation' when used in this section, shall be understood to mean: (1) the ordinary merger or consolidation, or (2) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, that for a transaction to be regarded as a merger or consolidation within the purview of this section, it must be undertaken for a bonafide business purpose and not solely for the purpose of escaping the burden of taxation." The foregoing transaction results in effect not to a merger but to a distribution in liquidation and shall give rise to recognition of gain or loss. casia The assets of B shall be transferred at fair market value. 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."