BIR Ruling

November 3, 1976 Merger of Business Corporation Tax Consequence This refers to your letters dated December 17, 1974 and January 10, 1975, requesting a ruling on the tax consequence of the proposed reorganization between Gandara & Sons, Inc. (hereinafter referred to as G&S) and Gandent (Gandent Enterprises) Management Corporation (hereinafter referred to as GMC). It is represented that G&S is a Philippine corporation primarily authorized to manufacture, assemble, import and otherwise acquire goods of every class and description; that it is also authorized, among others, to acquire by purchase and to hold for investment to deal with or dispose of stocks, bonds, or any other obligations or securities of any corporation; that it may also acquire all or any part of the goodwill, rights, franchises, property and business of any person, entity or corporation and to pay the same in cash or stock, or other obligations of the corporation; that it has an authorized capital stock of 1,000,000 shares, with a par value of P100 per share, of which 251,504 (P25,150,400) shares are issued and outstanding as of September 30, 1974; and that as of the same date, its stockholders are as follows: Prior to March 30, 1975, the proposed effective date of the plan of reorganization, G&S will issue 34,536 additional (new issue) shares in exchange for shares of stock of Audiowealth, Inc. (AWI) owned by the following G&S stockholders: You represented that the foregoing exchange of 34,536 shares will be recognized as a taxable exchange; that the above shareholders shall report the respective capital gains realized in their individual income tax returns on RWI'S shares acquired prior to November 5, 1970; and that as to those shares acquired after November 5, 1970, the corresponding of 1% stock transaction tax shall be paid. Subsequent to the above exchange, G&S shall have 286,040 shares issued and outstanding, distributed follows: xxx xxx xxx As of March 31, 1974, G&S has retained earnings of P5,301,204. It is also represented that GMC is a Philippine corporation primarily organized to purchase, own, hold, control, sell and otherwise acquire businesses and enterprises, as well as to provided any such businesses and enterprises with management, administrative, technical, financial and planning services; that it is also authorized to issue its shares of capital stock in payment for property purchased of acquired by it, that it may sell, dispose of, transfer the business, goodwill of properties and undertakings of the corporation under such terms as it may see fit to accept; that it has an authorized capital stock of 300,000 shares, with a par value of P100, of which 15,750 (P1,575,000) shares are issued and outstanding; and that as of September 30, 1974, its stockholders are as follows: xxx xxx xxx Before March 30, 1975, GMC will issue 215,692 additional (new issue) shares in exchange for shares of stock owned by the following stockholders in ABC, Inc.,Audiowealth, Inc. DEF Trading Corp.,and G&S Corporation: You also represented that the foregoing exchange of 215,692 shares will be treated as a taxable transaction; that the abovenamed stockholders will report the respective capital gains realized on stocks acquired prior to November 5, 1970, in their individual income tax returns; and that as to those stocks acquired after November 5, 1970, the corresponding stock transfer tax will be paid; after said exchange, GMC shall have 231,442 shares issued and outstanding, distributed as follows: xxx xxx xxx As of the year ended September 30, 1974, GMC has a net income of P113,247. The book value of all its assets is P1,719,449. Its liabilities total P31,202. The plan of reorganization to be undertaken by G&S and ABC will be as follows: "1. GMC will transfer and assign to G&S all its assets and liabilities. The assets will be transferred at their book value. The tentative value of the assets and liabilities to be transferred to, and assumed by, G&S will be P1,719,449 and P31,202, respectively. Thus, the net book value of the assets to be transferred to G&S will be P1, 688,247. "2. Solely in exchange for the net assets transferred by GMC, G&S will issue to GMC 16,882 shares of stock with a par value of P100 each or a total of P1,688,200. "3. Immediately upon receipt of the shares of stock of G&S, GMC will distribute such shares pro-rata to its stockholders in complete redemption of its outstanding shares of stock. Thereafter, GMC will dissolve. "4. In the pro-rata distribution by GMC of the shares of stock of G&S, no fractional shares of G&S stock will be issued, but a single certificate for the aggregate of the fractional shares will be delivered to a bank or other independent agent for disposition in accordance with the instructions from the persons entitled to the fractional shares, either by sale for their account or by purchase of a fractional share to make up a full share for delivery." Finally, it is represented that the reorganization is motivated by the following reasons: "a. To combine the assets of the two corporations for investment and expansion purposes; "b. To effect operating economics by eliminating duplication of effort, facilities and personnel, the prevention of waster and the saving of time and to consolidate the stockholdings of the Gandara family in various companies; "c. To provide a more steady market for the maximum use of the facilities of both companies." In reply thereto, I have the honor to inform you that the reorganization under the plan described above is a merger within the contemplation of Sections 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 GMC of all its assets and liabilities G&S solely in exchange for G&S stocks 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 GMC upon its distribution of G&S stocks to its stockholders in complete redemption of its stock under Section 35(c)(2) of the Tax Code. 3. No gain or loss will be recognized to GMC stockholders upon the exchange of their GMC stocks solely for G&S stocks under Section 35(c)(2) of the Tax Code. 4. The basis of the G&S stocks received by GMC shall be the same as the basis of GMC net assets exchanged therefor in accordance with Section 35(c)(4)(a);the basis of the assets of GMC in the hands of G&S shall be the same as it would be in the hands of GMC in accordance with Section 35(c)(4)(b). 5. The basis of the G&S stocks received by the stockholders of GMC shall be the same as the basis of their GMC stocks exchanged therefor; 6. The foregoing transaction involving the issuance by G&S of its stocks to GMC in exchange for the assets of GMC, and the exchange of GMC stock and G&S stock between GMC and its stockholders are not subject to stock transaction tax. (Sec. 195-B, Tax Code, as amended) 7. The exchange of 34,536 new G&S shares with shares of Audiowealth, Inc. are subject to capital gains tax with respect to those stocks acquired before November 5, 1970 and to the stock transaction tax with respect to those acquired after November 5, 1970. 8. The exchange of 215,692 new GMC shares with shares in IMG, Inc.,Audiowealth, Inc.,DEF Trading Corp. and G&S Corporation are subject to capital gains tax with respect to those stocks acquired before November 5, 1970 and to the stock transaction tax with respect to those acquired after November 5, 1970. 9. The abovementioned transaction shall not be subject to the gift tax as there is no intention to donate on the part of any of the parties. 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 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. aisadc (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 stock of 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) cdasia