BIR Ruling [DA-243-00]

May 19, 2000 BIR RULING [DA-243-00] Sycip Gorres Velayo & Co . 6760 Ayala Avenue, Makati City Attention: Atty . R . M . C . Vinzon Gentlemen : This refers to your letter dated April 12, 200 stating that your client, American Wire Cable Co., Inc. (AWC), has established a Multi-Employer Retirement Plan with Philippine Remnants Co., Inc. (PRC), a tax-qualified retirement plan which took effect on November 1, 1989, to provide retirement, death and total permanent disability benefits for all its eligible employees, that the said Plan provides that the Trustee maintains separate accounts for each of the participating companies (AWC and PRC) with regard to their respective contributions to the Plan; that on December 3, 1999, the Securities and Exchange Commission (SEC) approved the corporate merger of AWC and PRC, with AWC emerging as the surviving corporation; that upon the effectivity of the merger, AWC as the surviving corporation, absorbed the PRC employees and its operations, as well as PRC's assets and liabilities, including the rights and properties owned and held by PRC in the Plan; that as a result of PRC's dissolution, the consolidation of AWC and PRC's operations and the transfer of the assets and liabilities of PRC to AWC, AWC has succeeded as the employer of the erstwhile PRC employees; that consequently, the Plan has ceased to become a "multiple" employer retirement plan, inasmuch as AWC has become the lone employer who contribute to the funds of the Plan; that the accrued actuarial benefits (AAB) of the erstwhile PRC employee has been transferred to the account of AWC in the said retirement fund in the custody of the Plan's Trustee upon the corporate merger of the participants to the Plan. In connection therewith, you now request confirmation of your opinion that "1. The Multi-Employer Retirement Plan maintains its tax-exempt status despite PRC's dissolution and AWC taking over as employer to erstwhile PRC employees, thereby making AWC the "lone" employer in the Plan; "2. The transfer of the actuarial accrued benefits (AAB) of the erstwhile PRC employees to the account of AWC in the Plan is not subject to tax; and "3. The excess funds in the PRC account, if any, after transferring the actuarial accrued benefits of the erstwhile PRC employees to the account of AWC in the Plan, and after paying off the other liabilities of the PRC relative to the Plan, accrue to AWC as the successor-employer and taxable to AWC, and not to PRC." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. The merger between AWC and PRC, and the consequent succession by AWC, as the employer of erstwhile PRC employees in the subsisting Multi-Employer Retirement Plan are not prejudicial to the AWC employee-members' rights in the Plan and to the absorbed PRC employee-members' rights therein, they will not affect the Plan's qualification under R.A. No. 4917 [now Section 32(B)(6)(a) of the Tax Code of 1997] and therefore the fund created to implement the provisions of the plan and the retirement pay to qualified retirees remain exempt. (BIR Ruling Nos. 49-97 dated April 14, 1997; DA-201-96 dated June 18, 1996) 2. Section 60(B) of the Tax Code of 1997 provides that the tax imposed by Title II shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (i) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (ii) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees; . . . Considering that the merger between AWC and PRC, AWC, as the surviving corporation, has absorbed PRC employees, operations and all its assets and liabilities including its contributions made to the Plan had been transferred to AWC upon PRC's dissolution, AWC, in effect, has ipso facto become the successor corporation. Accordingly, the transfer of the actuarial accrued benefits (AAB) of the erstwhile PRC employees to the account of AWC in the Plan is not subject to income tax because the beneficial ownership on the benefits of the Plan have not been transferred to the employees. 3. Finally, the excess funds in the PRC account, if any, after transferring the actuarial accrued benefits (AAB) of the erstwhile PRC employees to the account of AWC in the Plan, and after paying off the other liabilities of PRC relative to the Plan, shall accrue to AWC as the successor employer and taxable to AWC and not to PRC. 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. llcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner (Legal Service)