BIR Ruling [DA-253-96]

July 18, 1996 BIR RULING [DA-253-96] Far East Bank & Trust Company Far East Bank Center Sen. Gil J. Puyat Avenue 1200 Makati City Attention: Atty . Rodolfo B . Fernandez Vice President TBG - Legal Gentlemen : This refers to your letters dated October 26, 1993, January 8 and 18, 1996 and May 22, 1996 stating that several titles of Cavite Araw-Araw Development Bank (CDB) and Second Laguna Development Bank (SLDB) were already transferred to the Far East Bank and Trust Company (FEBTC) as a result of the merger executed by and between FEBTC, CDB and SLDB on March 23, 1992; that the Revenue District Officer (RDO) of the BIR issued Certificates Authorizing Registration (CAR) after FEBTC submitted the relevant documents; that in some instances, however, the RDO refused to issue CAR in the absence of a ruling from the BIR exempting FEBTC from taxes as a result of the merger; and that the Registry of Deeds refused to issue the corresponding titles to the transferred properties without the CAR and payment of additional taxes; hence this request for ruling as to the tax consequence of the merger executed by and between CDB, SLDB and FEBTC with FEBTC as the surviving corporation. It is represented that in line with the policy of the Government to promote mergers and consolidation among banks and other financial intermediaries as a means to develop larger and stronger financial institutions and pursuant to Resolution No. 822 dated July 26, 1991 of the Monetary Board of the Central Bank of the Philippines, authorizing in principle the merger of CDB, SLDB and FEBTC, a Plan of merger was executed by CDB, SLDB and FEBTC on March 23, 1992; that FEBTC owns ninety eight and 91/100 percent (98.91%) and ninety six and 75/100 percent (96.75%) of the outstanding shares of stock of CDB and SLDB respectively; that CDB, and SLDB offices, branches, franchises, assets and liabilities will be transferred to and assumed by FEBTC, and CDB and SLDB's operations will become part of the commercial banking operations of FEBTC; that as of the effective date of the merger, FEBTC as the surviving corporation shall, in accordance with the Deed of Transfer of Assets and Liabilities acquire all the assets, including asset which were omitted and acquired after December 31, 1991, if any, upon the effectivity of the merger, and assume all of the liabilities of CDB and SLDB in exchange for FEBTC's investment in the equity of CDB and SLDB; that the exchange of values shall be based on the market value of FEBTC shares against the book value per share of CDB and SLDB as of December 31, 1991 as reflected in their Audited Financial Statements; that as of December 31, 1991, FEBTC shares were traded at the stock exchanges at P485.00 per share, while the constituent absorbed corporations have the following book values on their shares: Book Value Per Share Class C D B S L D B Common P1,068.94 P471.00 Preferred A 193.54 Preferred B 212.24 109.46 Preferred C 1 211.78 Preferred C 2 234.40 Preferred C-3 148.00 that FEBTC, therefore, is supposed to issue, more or less, the following number of FEBTC shares to the stockholders of CDB and SLDB. C D B Shares Conversion FEBTC Stockholders of: Outstanding Ratio Shares Common 40,580 2.204% 89,438 Preferred A 47,497 0.399% 18,951 Preferred B 11,923 0.438% 5,222 Total: 100,000 113,611 ====== ====== S L D B Shares Conversion FEBTC Stockholders of: Outstanding Ratio Shares Common 50,000 0.971% 48,550 Preferred A Preferred B 5,000 0.226% 1,130 Preferred C 1 30,000 0.437% 13,110 Preferred C 2 6,000 0.483% 2,898 Preferred C 3 9,000 0.305% 2,745 Total: 100,000 68,433 ====== ===== that as a result of the merger, the corporate existence of CDB and SLDB shall cease; that FEBTC as the surviving corporation shall possess all the rights, privileges, immunities, and franchises of each of the constituent absorbed corporations; and all property, real or personal and all receivables due on whatever account including subscriptions to shares and other interest of, or belonging to or due to each constituent Absorbed Corporations including assets which are omitted and acquired after December 31, 1991, if any, up to effectivity of the merger, shall be taken and deemed to be transferred to and vested in FEBTC as the surviving corporation without further act or deed; and that FEBTC as the surviving corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent absorbed corporations in the same manner as if FEBTC had itself incurred such liabilities or obligations, and any claim, action or proceeding pending by or against any of the constituent absorbed corporations may be prosecuted by or against the surviving corporation. In reply thereto, I have the honor to inform you that the above reorganization is a merger within the contemplation of Section 34 (c)(2) and (5) (b) of the Tax Code because a corporation, FEBTC will acquire all the assets and assume all the liabilities of CDB and SLDB solely for stocks, the transaction to be undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer of CDB and SLDB of all its assets and liabilities to FEBTC solely in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 34 (c)(2) of the Tax code. No gain or loss shall be recognized to CDB and SLDB upon the distribution of FEBTC shares to CDB and SLDB stockholders in complete redemption of their stocks under Section 34 (c)(2) of the Tax Code. No gain or loss shall be recognized to CDB and SLDB stockholders upon the exchange of their stocks solely for FEBTC stocks under Section 34 (c) (2) of the Tax Code. The basis of the assets received by FEBTC shall be the same as it would be in the hands of CDB and SLDB. The basis of FEBTC stocks received by the stockholders of CDB and SLDB shall be the same as the basis of the CDB and SLDB stocks surrendered in exchange therefor. If the total liabilities to be assumed by FEBTC upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by CDB and SLDB, the excess shall be recognized as gain of CDB and SLDB [Section 34 (c)(4)(b), Tax Code, as amended by P.D. No. 1773] It is understood, however, that upon the subsequent sale or exchange of the assets or shares of stock acquired by the parties, the gain derived from such sale or exchange shall be subject to income tax. The abovementioned transactions 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 as merger under Section 34 (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, which is a party to the 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: cdtech (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 stocks 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 distribution 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 gains 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 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. 9803-8, P-H 1963 ed., p. 9611) In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporation 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 stocks received as a consequence of the merger. (BIR Ruling No. 250-91 dated November 15, 1991) 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. cdt Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Rev. Executive Assistant Legal Service