BIR Ruling

October 9, 1973 Messrs. Livioco & Associates R-326 Natividad Building Escolta, Manila Attention: E . M . Livioco Gentlemen : This refers to your letter dated March 5, 1973 requesting information on the tax incidence in connection with the projected merger of Stanford Associates, Inc. (SAI) and Stanford Microcircuits, Inc.(SMI), which are both registered with the Board of Investments as non-pioneer and pioneer enterprises, respectively. cdtech It is represented that the projected merger of SAI and SMI is for a bona-fide business purpose, and the merger will simplify the organization and achieve economy in operation. It appears that SMI and SAI are engaged in allied, if not the same, businesses, namely: the manufacture, processing and sale of memory products, as regards SAI, and the manufacture, processing and sale of electronic products and services with respect to SMI. SAI itself and almost all of its stockholders are also stockholders of SMI. Five of the directors of SAI are also directors of SMI, and both corporations have common executives and administrative staff and their offices and plant are housed in the same building. It is projected that the merger will result in greater economic power and in improved leverage necessary in transacting business with purchasers, banks, investors, etc. The merger shall also facilitate the "corporation going public" as the enlarged size of the surviving company will enable it to seek listing in the stock market. Finally, the merger will eliminate the problem of allocating administrative cost to each merging corporation. The merger shall be accomplished as follows: SMI shall acquire all the assets and liabilities of SAI, and in exchange therefor, will issue SMI stocks to SAI. SAI will then distribute all the SMI shares to all its stockholders in exchange for its own shares and then dissolve. In reply, I have the honor to inform you as follows: Section 35(c)(1) and (2) of the Tax Code provides 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 or 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 whose transaction or series of transactions shall be treated as a single unit. (See Section 35(c)(5)(b), Tax Code) From the overall perspective of your client's merger plan, the merger appears to have a bona fide business purpose. As a consequence of the merger, no gain or loss shall be recognized both on the part of SMI and SAI on one hand and on the part of SAI stockholders on the other hand. However, the basis of the SMI shares to be received by the SAI stockholders shall be the same as the basis of the SAI shares they exchanged therefor; and the basis to SMI of the assets of SAI it will acquire in exchange for its own shares shall be the same as the basis to SAI of the same assets as of the transfer. In this connection, the parties to 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. Each 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 gain or loss in connection with the reorganization, including: aisadc (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. cdta (b) Every taxpayer, other than a corporation a party to the reorganization, who receives 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) 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 and the amount of stock or securities and other property or money received (including and 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. 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. cdt 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."