BIR Ruling

February 20, 1975 Messrs. Sycip, Gorres, Velayo & Co. P. O. Box 589, Manila Gentlemen : This refers to your letter dated November 11, 1974, requesting a ruling on the tax consequences of the proposed reorganization of the Pacific Hydrogen Corporation (Herein referred to as PHC), the Pacific Oxygen and Acetylene Company (herein referred to as POACO), and X Consolidated Company. It is represented that PHC is a Philippine Corporation primarily organized to engage in the manufacture and sale of hydrogen gas, containers and other related products; that it has an authorized capital stock of P1 million divided into 10,000 shares each, of which 4,004 shares with a total issued value of P400,400 are issued and outstanding as of October 18, 1974; and that both PHC and POACO are controlled by the same group of stockholders. cd From the audited financial statements of PHC for the period ended October 18, 1974, it has total assets of P946,810.50 as against current liabilities of P546,000 and stockholders' equity of P400,810.50. Part of its assets consists of an account receivable from POACO in the amount of P350.000. POACO is a Philippine corporation primarily organized to engage also in the manufacture and sale of gases for industrial, commercial medical and domestic uses and to engage generally in line of business similar to those PHC; that from its audited financial statements for the year ended December 31, 1973, POACO has an authorized capital stock of P5 million divided into 50,000 shares with a par value of P100 each, of which 46,004 shares with an issued value of P4,006,400 are issued and outstanding; and that as of said date, it has total assets of P16,890.783, total liabilities (current and long-term) of P3,314,645 and stockholders' equity of P13,576,138 (including appraisal surplus). An appraisal made by Appraisers (Philippines) Inc. of the sound value of POACO's fixed assets as of May 25, 1974, disclosed that such value was placed at #18,066,000; that its adjusted basis (re-valued) in such fixed assets is P13,065,436, as shown in its financial statements for the year ended December 31, 1973; and if the book value of all assets amounting to P3,825,356 is added, POACO will have total assets of P21,891,346. X Consolidated Company will be organized under Philippine laws to engage in the line of business similar or related to those of PHC and POACO; and that it will have an authorized capital of P50 million divided into 500,000 shares with a par value of P100 each. The proposed reorganization the effective date of which is tentatively set on January 1, 1975 will be substantially as follows: "1. PHC will transfer and assign all its assets and all its liabilities to X Consolidated with a net transfer value of P400,810.50. The Assets will be transferred at their book values. Solely in exchange therefor, X Consolidated will issue to PHC 4,008 shares of its stocks with a par value of P100 each or a total par value of P400,800. The excess of P10.50 will be treated as paid-in surplus. "2. Pursuant to the plan of consolidation, PHC, upon receipt of the shares of X Consolidated, will distribute such shares pro rata to its stockholders in complete redemption of its outstanding shares of stock. Thereafter, PHC will dissolve. "3. POACO will transfer and assign all its assets and liabilities to X Consolidated, with a net transfer value of P18 million. The fixed assets will be transferred to appraised value while the current assets at book value. Solely in exchange therefor, X Consolidated will issue to POACO 180,000 of its shares of stock with a par value of P100 or a total par value of P18 million. Any excess of total net assets over the total par value of X Consolidated shares issued to POACO will be treated as paid-in surplus in the books of X Consolidated. cdta "4. Pursuant to the plan of consolidated, POACO, upon receipt of the shares of stock of X Consolidated, will distribute such shares pro rata to its stockholders in complete redemption of its outstanding shares of stock. Thereafter, POACO will dissolve." It is also represented that the consolidation is motivated by the following bona fide business reasons: "1. The combination of the manufacturing, marketing and administrative facilities of PHC and POACO will result in economy and efficiency of operations by reducing administrative and operating costs through elimination of duplication of efforts and facilities. "2. The consolidation of the assets of PHC and POACO will put the consolidation company in a better position to employ its capital resources in the conduct and expansion of its business and enable it to procure financing and credit facilities under much more favorable terms. "3. The consolidation of the two companies is rational since they both engaged in the same or complementary lines of business. In reply thereto, I have the honor to inform you that the reorganization under the plan described above is a consolidation 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 PHC and POACO of their assets and liabilities to X Consolidated Company solely in exchange for X Consolidated Stock 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 PHC and POACO upon their distribution of X Consolidated stock to their stockholders in complete redemption of their stock under Section 35(c)(2) of the Tax Code. 3. No gain or loss will be recognized to PHC and POACO stockholders upon the exchange of their PHC and POACO stocks solely for X Consolidated stock under Section 35(c)(2) of the Tax Code. 4. The basis of the X Consolidated stock received by PHC and POACO shall be the same as the basis of PHC and POACO in their net assets exchanged therefor in accordance with Section 35(c)(4)(a); the basis of the assets of PHC and POACO in the hands of X Consolidated shall be the same as it would be in the hands of PHC and POACO in accordance with Section 35(c)(4)(b). 5. The basis of X Consolidated stock received by the stockholders of PHC and POACO shall be the same as their basis their PHC and POACO stocks exchanged therefore. 6. The foregoing transaction including the issuance and exchange of shares of stockholders are not subject to stock transaction tax. (Section 195-B, Tax Code as amended). 7. The abovementioned transaction shall not be subject to the gift tax as there is intention to donate on the part of any of the parties. However, in order that the above described reorganization can be considered a consolidation or merger under Section 35(c)(2) of the Tax Code, the parties to the consolidation 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 within 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 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 re-organization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate re-organization 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 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. 9802-B, P-H 1963 ed., p. 9611) Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN 1601-593-5