BIR Ruling [DA-084-03]

March 19, 2003 BIR RULING [DA-084-03] Padilla Law Office 7/F Padilla-De Los Reyes Building 232 Juan Luna Street Binondo, Manila Attention: Atty. Sabino Padilla, Jr. Gentlemen : This refers to your letter dated September 17, 2001 stating that Colegio de Santa Isabel (CSI) is a non-stock, non-profit educational corporation situated in Naga City, Camarines Sur; that it is offering elementary and high school courses duly recognized by the Department of Education, and tertiary level or college courses duly recognized by the Commission on Higher Education (CHED);that it was founded in 1868 and has applied for University status with the CHED; that on the other hand, Mother Seton Hospital (MSH) is a non-stock, non-profit religious and charitable corporation situated in Naga City, Camarines Sur, and operates the Mother Seton Hospital with over 100 beds; that it is duly licensed by the Department of Health and furnishes medical care to the sick, especially, the poor and the needy; that it was founded in 1958; that both CSI and MSH are instrumentalities of and managed by the Congregation of the Daughters of Charity of Saint Vincent de Paul, a religious congregation of sisters of the Roman Catholic Church; that in line with the policy of the Congregation, CSI and MSH to provide quality education and health care to the Bicol Region and adjoining regions, and in order to create closer cooperation and integration of both institutions, especially in the area of the healing sciences, such as medicine, nursing, medical technology, midwifery, physical therapy and pharmacy, a plan of merger was adopted by both institutions for MSH to be merged with and into CSI, with CSI as the surviving corporation; that upon issuance by the Securities and Exchange Commission (SEC) of the Certificate of Filing of Articles of Merger; (a) all the properties of MSH, real or personal and all receivables due on whatever account, and all and every other interest of or belonging to, or due to MSH shall be deemed transferred to CSI, without further act or deed; (b) CSI shall be responsible and liable for all liabilities and obligations of MSH in the same manner as if CSI had itself incurred such liabilities and obligations; (c) MSH shall cease to exist as a corporation; (d) the members of MSH shall automatically become members of CSI. However, it should be emphasized that since CSI and MSH are non-stock, non-profit institutions, no member has any right or interest in the assets or income of the corporation, before or after the merger; that moreover, in line with the existing practice in both institutions, members of the corporation are professed sisters of the Congregation of the Daughters of Charity of St. Vincent de Paul, who are assigned by the Provincial Superior of the Congregation to the institution; that they cease to be such when they are assigned to other missions by the same Provincial Superior; that Lay people may become members of the corporation only when nominated by the Provincial Superior for the Board of Trustees of the institution; that they cease to be members of the corporation when they cease to be trustees; and that the trustees do not receive any compensation as such. In connection therewith, you now request confirmation of your opinion that "1. No gain or loss is realized or shall be realized by either MSH or CSI when the assets and liabilities of MSH become the assets and liabilities of CSI as a result of the merger, since MSH and its members will not receive any monetary or other consideration for such transfer and CSI in turn will not pay any monetary or other consideration for such transfer; "2. No gain or loss shall be recognized by the members of CSI and MSH as a result of the merger, since they will not receive any monetary or other consideration for the merger, and they will continue to have no interest or right to the assets or income of the merged institutions; "3. The tax bases of the properties transferred to CSI shall be the same as the tax bases when owned by MSH; "4. The transfer of assets of MSH, which are in excess of the liabilities and obligations of MSH, shall not be considered a transfer of property for an insufficient consideration subject to donor's tax, since the transaction is purely for a legitimate purpose and in any event, even if viewed as a donation, the same is made to a non-stock, non-profit educational corporation and therefore exempt under Section 47 of B.P. 232, the Education Act of 1982, and Section 25 of the same law, as amended by R.A. 7798; and "5. The transfer of the assets and liabilities shall not be subject to value-added tax or documentary stamp tax since the transaction is not for business or profit." In reply, please be informed that the merger of MSH with and into CSI does not fall under Section 40(C)(2) of the Tax Code of 1997, because the merging corporations are non-stock, non-profit corporations and Section 40(C)(2) deals with mergers or consolidations of stock corporations. cHAaCE However, it should be noted that the merger of non-stock corporations is expressly allowed by the Corporation Code of the Philippines (B.P. Blg. 68); thus Section 17 thereof speaks of the approval of a plan of merger by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations. Since the merger of non-stock corporations is not covered by Section 40(C)(2) of the Tax Code of 1997, the tax consequences of the merger will have to be determined under other provisions of the same Code. Such being the case, we hereby confirm your opinion that 1. No gain or loss will be realized on the transfer of assets and liabilities of MSH to CSI because the transferor will not receive any cash or property for the transfer of the assets; similarly, no gain or loss will be realized by MSH on the transfer to and assumption by CSI of its liabilities inasmuch as these liabilities do not exceed the fair market value of the assets transferred and in any event are not within the contemplation of a sale, exchange or disposition of property in a transaction for profit; 2. Since the transfer of the assets is not made for a consideration, the tax bases of the assets shall be the same as the tax bases thereof in the hands of the transferor pursuant to Section 40(B)(3) of the Tax Code of 1997; 3. No gain or loss will be realized by the individuals who comprise the membership of MSH and CSI because they will not receive any money or property as a result of the merger and they will continue to have no interest or right to the assets and income of the merged institutions; 4. The transfer of the assets will not be subject to donor's or gift tax, even if the transfer of assets were to be considered as a transfer of properties for less than a full and adequate consideration in money or money's worth and therefore a gift, the same is still exempt from donor's tax under Section 101(A)(3) of the Tax Code of 1997 because it is made in favor of an educational institution; 5. The transfer of assets and liabilities will not be subject to value-added tax inasmuch as the transfer is not made in the course of trade or business ( Sec. 105, Tax Code of 1997 ); 6. The transfer of the assets of MSH to CSI will not be subject to documentary stamp tax under Section 196 of the Tax Code of 1997 insofar as real properties are involved, because the transfer is made without any monetary consideration and is not in connection with a sale. (BIR Ruling No. DA-084-2001 dated May 28, 2001) Moreover, it should be emphasized that since the transfer of the assets from MSH to CSI is one for less than an adequate and full consideration in money or money's worth and is therefore a gift or donation, Section 25 of B.P. Blg. 232, as amended by R.A. 7798, otherwise known as the "Education Act of 1982," which provides that taxes shall not be due on donations to educational corporations shall be applied. This is in line with the mandate in Section 4(4), Article XIV of the 1987 Philippine Constitution, which states that all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax, subject to the conditions prescribed by law. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group