BIR Ruling

September 15, 1966 Messrs. Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati, Rizal Attention: Mr . B . V . Abela Gentlemen : This refers to your letter dated September 8, 1966 relative to a plan of reorganization to be undertaken by and between Inter-Island Gas Service, Inc. (hereinafter referred to as IIGS), and the Borromeo Corporation (hereinafter referred to as BC). LLpr It appears that IIGS is a domestic corporation presently engaged in the manufacture and sale of liquified petroleum gas, gas cylinders, gas ranges, stoves and other appliances. The company has an authorized capital stock of P3,000,000 divided into 30,000 shares with a par value of P100 each. As of this writing, there are 9 stockholders owning 6,058 shares of the corporation and who have subscribed to 4,000 shares thereof. BC is also a domestic corporation and was organized for the purpose of engaging in the manufacturing, buying, selling, wholesaling and retailing, importing, exporting, distributing and generally dealing in gas or electrical appliances, parts, accessories, instruments, supplies and equipment. It has an authorized capital stock of P2,000,000 divided into 20,000 shares with a par value of P100 each. As of this writing, 4,000 of the authorized capital stock of the corporation had been subscribed. cdpr For the purpose of promoting operational efficiency and independence and the attainment of concentrated specialization and management specialization covering distinct lines of operations and for the purpose of obtaining more suppliers' credit and business for each of the aforementioned corporations and for the other business reasons stated in your letter. IIGS and BC are planning to effect a reorganization to be carried out as follows: 1. IIGS will transfer at net book value its operating assets connected with the manufacturing and sale of gas cylinders, gas ranges, stoves and other appliances to BC, equivalent to no less than 80% of the total assets of IIGS, solely in exchange for the shares of stock of BC having a total par value equal to the net book value of the net assets transferred. Incidental to the exchange, BC may increase its capital stock to be divided into shares having a fixed par value and will issue to IIGS such number of shares as may be necessary to cover the value of the net assets transferred. 2. BC will assume certain liabilities of IIGS as agreed upon, subject to the conformity of the creditors concerned. 3. The stockholders of IIGS shall surrender a ratable portion of their shares, and IIGS, in turn, shall distribute proportionately to its stockholders all of the BC shares in such number and in exchange for the shares surrendered by the IIGS stockholders. 4. IIGS shall continue the business of manufacturing, buying and selling liquified petroleum gas. 5. BC shall assume the business of manufacturing, buying and selling gas cylinders, gas ranges, stoves and other appliances. LLjur You now ask information on the following: 1. Whether or not the transfer at net book value of 80% of the total assets liabilities of IIGS to BC, in exchange for shares of stocks of the latter corporation having a total par value equivalent to the net assets transferred, will constitute a tax-free transaction on which no gain or loss, for income tax purposes, will be recognized to both corporations. 2. Whether or not the exchange by the stockholders of their IIGS shares for the BC shares pursuant to the reorganization plan will result in any gain or loss to the stockholders, for income tax purposes. 3. Whether or not the exchanges above-described will be subject to gift tax to the parties concerned. 4. What will be the basis of the shares of BC to be received by each stockholder of IIGS? 5. What will be the basis of the assets transferred to BC? In reply, I have the honor to inform you as follows: " Exceptions . 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, or (c) a security holder of a corporation which is a party to the merger or consolidation exchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation." Section 35(c)(5)(b), defines the term "merger" as follows: "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: . . . ." Under BIR General Circular No. V-253 dated July 16, 1957, implementing Section 35(c) of the Tax Code, the term "substantially all the properties" means at least 80% of the assets, including cash, of another corporation or the transferor corporation. In view of the above, this Office believes and so holds that: 1. The transfer at net book value of at least 80% of the total assets and liabilities of IIGS to BC, in exchange for shares of stocks of the latter corporation having a total par value equivalent to the net assets transferred, and the exchange by the stockholders of their IIGS shares for BC shares pursuant to the reorganization plan will constitute tax-free exchanges under Section 35(c)(2) of the Tax Code. 2. The parties concerned will not be subject to gift taxes on account of the above-mentioned exchanges. 3. The basis of the shares of BC to be received by the stockholders of IIGS will be the same as the basis or bases of their shares of stock in IIGS exchanged therefor. 4. The cost basis of the assets transferred to BC will be the net book value of said assets used as basis of the exchange. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue