Sycip Gorres Velayo & Co.

November 7, 2008 BIR RULING [DA-(S40M-016) 397-08] S40, Merger Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. M.F.A. Balili Tax Division Gentlemen : This refers to your letter dated March 12, 2008 requesting for a confirmatory ruling that the proposed merger of your clients, Federal Brent Retail, Inc. ("FBRI"), Federal Brent Oil Corporation ("FBOC"), Cook N Grill Food Corporation, ("CNG"), Cook N Grill Marquinton Food Corp. ("Marquinton"), Fed Brent Superbowl Corp. ("Superbowl"), FLI-Brent Food Corporation ("FBFC"), FLI-Brent Pancake Food Corp. ("Pancake"), and Blue Wave Cinema Corp. ("Cinema"), with FBRI as the surviving corporation, is a tax-free merger pursuant to Section 40 (C) (2) (a) and (b), in relation to Section 40 (C) (6) (b) of the Tax Code of 1997, as amended. The facts as represented are as follows: a. FBRI, FBOC, CNG, Marquinton, Superbowl, FBFC, Pancake and Cinema (the "constituent corporations") are all corporations duly organized and existing under the laws of the Republic of the Philippines. FBRI, Marquinton, Superbowl, Pancake and Cinema (the "Marikina Group") hold their principal offices at Brgy. Sto. Nio, Sumulong Hi-way, Marikina City. While FBOC, CNG and FBFC (the "Macapagal Group") hold their principal offices at Pres. Diosdado Macapagal Boulevard cor. Edsa Ext., Pasay City. b. The constituent corporations are engaged in the following line of businesses: FBRI and FBOC are engaged in the business of operating and maintaining a petroleum service station, the trading of goods such as petroleum, non-fuel products on wholesale or retail basis, and other allied services, and are additionally engaged in the food and restaurant business; CNG, Marquinton, Superbowl, FBFC and Pancake are all engaged in the business of catering food and establishing, operating and maintaining restaurants, coffee shops, refreshment parlors and cocktail lounges; and Cinema is engaged in the business of furnishing amusement and entertainment to the public, either indoors or outdoors by carrying on a general theatrical and amusement business and every activity connected therewith, such as but not limited to owning, purchasing, leasing or otherwise, acquiring and managing, operating and controlling amusement and theme parks, outdoor theaters, indoor cinemas and motion picture theaters, arenas and other places of public entertainment and amusement, to include incidental activities such as dining and drinking places novelty shops and similar establishments. c. The authorized capital stock ("ACS") and the number of shares outstanding of the constituent corporations are as follows: FBRI has an ACS of P50,000,000 divided into 500,000 shares with a par value of P100 per share, of which 125,000 shares are issued and outstanding; FBOC has an ACS of P50,000,000 divided into 500,000 shares with a par value of P100 per share, all of which are issued and outstanding; Marquinton has an ACS of P5,000,000 divided into 50,000 shares with a par value of P100 per share, of which 12,500 shares are issued and outstanding; Pancake has an ACS of P5,000,000 divided into 50,000 shares with a par value of P10 per share, all of which are issued and outstanding; Superbowl has an ACS of P5,000,000 divided into 50,000 shares with a par value of P100 per share, all of which are issued and outstanding; Cinema has an ACS of P5,000,000 divided into 50,000 shares with a par value of P100 per share, of which 12,500 shares are issued and outstanding; FBFC has an ACS of P10,000,000 divided into 100,000 shares with a par value of P100 per share, all of which are issued and outstanding; and CNG has an ACS of P5,000,000 divided into 50,000 shares with a par value of P100 per share, all of which are issued and outstanding. DScTaC d. The stock ownership structure of the constituent corporations are as follows: FBRI is 59.98% owned by Federal Land, Inc. ("FLI") and 40% owned by Brent Oil Corporation ("BOC"); FBOC is 41% owned by FLI and 49% owned by BOC; CNG and FBFC are 100% owned by FBOC; and Marquinton, Superbowl, and Cinema are 60% owned by FBRI and 40% owned by BOC. e. The constituent corporations desire to merge, with FBRI as the surviving corporation, due to the following business purposes: (a) the constituent corporations have common stockholders and the consolidation of the capital base of the constituent corporations will improve the competitive position and financial strength of the surviving corporation, resulting in increased leverage in the procurement of materials and services, and reduction in overall financing costs; and (b) the integration of the administrative facilities of the constituent corporations will result in the simplification of business processes, improved operational efficiency, reduction of operating costs, and minimization of waste. f. On November 12, 2007, FBRI filed with the Securities and Exchange Commission (SEC) its application for the approval of its merger with FBOC, CNG, Marquinton, Superbowl, FBFC, Pancake, and Cinema, with simultaneous applications to increase its ACS from P50,000,000 to P150,000,000, and for FBRI to undergo equity restructuring, which shall be effected by the conversion of its advances from FLI and BOC in the amounts of P25,830,300 and P24,167,700, respectively, into equity (a total of P50,000,000 advances converted into equity). g. On March 11, 2008, the SEC approved the merger effected by the Board of Directors of the constituent corporations. On even date, the SEC approved FBRI's requests to increase its ACS, and accordingly issued a Certificate of Increase of Capital Stock and a Certificate of Filing of the Amended Articles of Incorporation. h. Under the merger, all the assets and liabilities of FBOC, CNG, Marquinton, Superbowl, FBFC, Pancake, and Cinema (the "absorbed corporations") were conveyed, assigned, and transferred to FBRI solely in exchange for shares of FBRI. These assets were transferred at the net asset value of the absorbed corporations as determined on the basis of their audited financial statements as of June 30, 2007. Furthermore, under the Plan of Merger, the effective date of the merger is on December 1, 2007. i. Of the increase in ACS, FBRI will issue the following: (1) 258,303 shares with a total par value of P25,830,300 to FLI, and 241,697 shares with a total par value of P24,169,700 to BOC as a result of the conversion of the P50,000,000 advances into equity; and (2) 530,238 shares to the stockholders of the absorbed corporations with a total par value of P53,023,800 in exchange for the total net assets of the absorbed corporations transferred to FBRI pursuant to the merger amounting to P57,650,863. The difference of P4,627,063 between the total net asset value and total par value of the shares issued by FBRI represents the total par value of the 46,271 shares corresponding to the investment account of FBRI in the four (4) absorbed corporations namely Marquinton, Superbowl, Pancake, and Cinema which were taken out of the share distribution in order to avoid issuance of treasury shares to Fed Brent Retail. j. After the conversion of advances into equity, merger and increase in ACS, the total outstanding capital stock of FBRI is P115,523,800 with FLI and BOC owning 47.08% and 47.67%, respectively. In connection therewith, you are requesting confirmation of your opinion as follows: 1. The merger of the constituent corporations, with FBRI as the surviving corporation, is a merger within the contemplation of Section 40 (C) (2) (a) and (b), in relation to Section 40 (C) (6) (b) of the Tax Code, as amended. Therefore, no gain or loss shall be recognized by the absorbed corporations, as the transferors, on the transfer of all their assets and liabilities to FBRI pursuant to the merger. Likewise, no gain or loss shall be recognized by FBRI, as the transferee, on its receipt of the assets and liabilities of the absorbed corporations in exchange for FBRI shares. 2. The transfer of the assets by the absorbed corporations to FBRI is not subject to donor's tax since there is no intention on the part of the absorbed corporations to donate their assets to FBRI since the transaction is being undertaken for purely business purposes. 3. The transfer of properties by the absorbed corporations to FBRI is not subject to documentary stamp tax (DST) pursuant to Section 199 (m) of the Tax Code, as amended by Republic Act (RA) No. 9243. Likewise, the surrender of the shares of stock held by the stockholders of the absorbed corporations to FBRI in complete redemption and cancellation of the capital stock of the absorbed corporations pursuant to the merger is likewise not subject to DST. However, DST at the rate of P1.00 on each P200 par value, or fractional part thereof, will be imposed on the original issuance of shares by FBRI to FLI and BOC, for the conversion of advances into equity, and to the stockholders of the absorbed corporations, as a consequence of the merger, pursuant to Section 174 of the Tax Code, as amended by RA No. 9243. AECDHS 4. The transfer of the assets of the absorbed corporations pursuant to the merger is not subject to the Value-Added Tax (VAT) as provided under Section 4.106-8 (b) (3) of Revenue Regulations (RR) No. 16-05, as amended. Any unused input VAT of the absorbed corporations, as of the effective date of merger, will be absorbed by FBRI pursuant to Section 4.106-8 (b) (3) of RR No. 16-05, as amended. 5. The excess and unutilized creditable withholding taxes of the absorbed corporations as of the effective date of the merger, which form part of the assets to be transferred by the absorbed corporations to FBRI as a consequence of the merger, may be applied as a tax credit by FBRI against its income tax due for the taxable year 2007, the effective date of the merger being December 1, 2007, and in the succeeding taxable years, or may be the subject of a claim for refund or issuance of a tax credit certificate (TCC). 6. The excess MCIT of the absorbed corporations will be transferred and vested in FBRI as of the effective date of the merger. 7. The accumulated unutilized NOLCO of the absorbed corporations are preserved, transferred to and vested in FBRI, as the surviving corporation, and may be carried over and claimed by FBRI as a deduction from its gross income pursuant to Section 34 (D) (3) of the Tax Code, as amended. In reply thereto, please be informed as follows: 1. Tax-Free Exchange The merger of the constituent corporations is a tax-free exchange under Section 40 (C) (2), in relation to Section 40 (C) (6) (b) of the Tax Code, as amended, viz.: "SEC. 40. Determination of Amount and Recognition of Gain or Loss. xxx xxx xxx (C) Exchange of Property. xxx xxx xxx (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; or (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." In this connection, Section 40 (C) (6) (b) of the Tax Code, as amended, defines the term "merger" as follows: "(b) The term "merger" or "consolidation", when used in this Section, shall be understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation; provided, further, that in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit, provided, finally, that in determining whether the property transferred constitutes a substantial portion of the business of the transferor, the term "property" shall be taken to include the cash assets of the transferor." Based on the foregoing, the elements of a tax-free merger are as follows: (1) there must be a merger and a plan of merger; (2) the parties to the merger must, as a general rule, exchange property solely for stock, pursuant to the plan of merger; and (3) the merger must be undertaken for a bona fide business purpose and not solely for purpose of escaping the burden of taxation. Since all these elements are present in the case of the merger of the constituent corporations, the merger qualifies for non-recognition of gain or loss for income tax purposes in accordance with Sections 40 (C) (2) of the Tax Code, as amended. Thus, no gain or loss shall be recognized by the absorbed corporations, as transferors, on the transfer of all their assets and liabilities to FBRI solely in exchange for FBRI shares, pursuant to the Plan of Merger. Likewise, no gain or loss shall be recognized by FBRI, as the transferee, on its receipt of the assets and liabilities of the absorbed corporations pursuant to and as a consequence of the merger. CSaHDT The basis of the assets and liabilities to be received by FBRI shall be the same as it would be in the hands of the absorbed corporations; the cost basis to the transferee of the property transferred, pursuant to the merger, shall be the same as it would be in the hands of the absorbed corporations (Sections 40 (C) (5) (a) and (b) of the Tax Code). Accordingly, the substituted bases of the assets transferred by the absorbed corporations to FBRI as of June 30, 2007, and pursuant to the merger, are as follows: COOK N GRILL FOOD CORP. PROPERTY SUBSTITUTED BASIS Cash on hand & in back P14,565,409 Receivables 18,606,116 Inventories 624,147 Other current assets 1,760,128 Property and equipment net 13,343,002 Franchise net 2,869,048 Other assets 796,234 Total Assets P52,564,084 ========== FLI-BRENT FOOD CORP. PROPERTY SUBSTITUTED BASIS Cash on hand & in bank P8,505,229 Receivables 8,792,020 Inventories 482,846 Other current assets 105,825 Property and equipment net 7,337,733 Franchise net 749,969 Others assets 460,755 Total Assets P26,434,377 ========== FED BRENT SUPERBOWL CORP. PROPERTY SUBSTITUTED BASIS Cash on hand & in bank P1,252,421 Receivables 1,522,317 Inventories 116,837 Other current assets 392,564 Property and equipment net 1,808,469 Franchise net 1,085,714 Other assets 756,245 Total Assets P6,934,567 ========== FLI-BRENT PANCAKE FOOD CORP. PROPERTY SUBSTITUTED BASIS Cash on hand & in bank P974,347 Receivables 3,984,655 Inventories 76,051 Prepayments & other current assets 33,025 Property and equipment net 3,690,124 Franchise net 775,000 Other assets 260,480 Total Assets P9,793,682 ========== COOK N GRILL MARQUINTON FOOD CORP. PROPERTY SUBSTITUTED BASIS Cash on hand & in bank P1,615,173 Receivables 1,075,509 Inventories 361,230 Prepayments & other current assets 25,291 Property and equipment net 7,764,488 Franchise net 719,697 Other noncurrent assets 233,100 Total Assets P11,794,488 ========== BLUE WAVE CINEMA CORP. PROPERTY SUBSTITUTED BASIS Cash on hand & in bank P1,424,336 Accounts Receivable 273,024 Inventories 95,766 Prepayments & other current assets 2,177,594 Property and equipment net 22,589,952 Total Assets P26,560,672 ========== FEDERAL BRENT OIL CORPORATION PROPERTY SUBSTITUTED BASIS Cash on hand & in bank P7,249,138 Accounts Receivable 44,401,432 Inventories 12,690,709 Prepayments & other current assets 12,215,246 Investments in shares of stock 11,250,000 Property and equipment net 113,761,409 Other noncurrent assets 6,199,392 Total Assets P207,767,326 ========== The investments in shares of stock amounting to P11,250,000 consist of investment to its wholly-owned subsidiaries, likewise parties to the merger, Cook N Grill Food Corp. and FLI-Brent Food Corp., of P10,000,000 and P1,250,000, respectively. Likewise, the stockholders of the absorbed corporations shall recognize no gain or loss when they exchange, in complete redemption, their shares for FBRI shares issued pursuant to the Plan of Merger. The basis of the FBRI shares that will be issued to the stockholders of the absorbed corporations shall be the same as the basis of the absorbed corporations' stocks surrendered in exchange therefore (BIR Ruling DA-075-03 dated March 11, 2003, BIR Ruling No. DA-037-02 dated July 7, 2002, BIR Ruling No. 039-02 dated March 7, 2002, BIR Ruling No. DA-184-02 dated October 11, 2002). SUBSTITUTED BASIS OF SHARES RECEIVED PER SHAREHOLDER OF THE ABSORBED CORPORATIONS Name of Corporate Number of Substituted Substituted Basis Stockholders Shares Basis per share (including its respective nominal stockholders FBOC Federal Land, Inc. 179,987 P20,400,000 P113.34 Alfred V. Ty 618 70,000 113.27 Leo Ferreria 88 10,000 113.64 Peter Wu 88 10,000 113.64 Alexander Ty 88 10,000 113.64 Toyota Manila Bay 44,114 5,000,000 113.34 Corp. Edward William Tan 882 100,000 113.38 Edwin William Tan 441 50,000 113.38 Edmund William Tan 441 50,000 113.38 Brent Oil Corporation 214,396 28,261,339.83 131.82 CNG Federal Land, Inc. 18,257 2,035,945 111.52 Alfred V. Ty 81 9,025 111.43 Leo Ferreria 18 2,004 111.31 Peter Wu 18 2,004 111.31 Alexander Ty 27 3,004 111.25 Toyota Manila Bay 4,475 499,033 111.52 Corp. Edward William Tan 107 11,925 111.45 Edwin William Tan 54 6,018 111.45 Edmund William Tan 54 6,018 111.45 Brent Oil Corporation 21,747 2,425,135 111.52 FBFC Federal Land, Inc. 12,442 4,075,933 327.59 Alfred V. Ty 49 16,087 328.30 Leo Ferreria 9 2,966 329.51 Peter Wu 12 3,966 330.46 Alexander Ty 9 2,966 329.51 Toyota Manila Bay 3,049 998,836 327.59 Corp. Edward William Tan 67 21,983 328.11 Edwin William Tan 34 11,155 328.10 Edmund William Tan 34 11,155 328.10 Brent Oil Corporation 14,820 4,854,953 327.59 Marquinton Alfred V. Ty 16 1,200 75.00 Leo Ferreria 8 600 75.00 Edward William Tan 1,357 100,000 73.69 Edwin William Tan 679 50,000 73.64 Terence Cham 8 600 75.00 Brent Oil Corporation 4,751 2 0.000421 Superbowl Alfred V. Ty 6 4,800 800.00 Leo Ferreria 3 2,400 800.00 Edward William Tan 542 400,000 738.01 Edwin William Tan 271 200,000 738.01 Terence Cham 3 2,400 800.00 Brent Oil Corporation 1,896 1,050,002 553.80 Pancake Alfred V. Ty 10 2,000 200.00 Leo Ferreria 5 1,000 200.00 Peter Wu 5 1,000 200.00 Alexander Ty 10 2,000 200.00 Edward William Tan 10 2,000 200.00 Edwin William Tan 5 1,000 200.00 Edmund William Tan 5 1,000 200.00 Cinema Alfred V. Ty 10 1,200 120.00 Leo Ferreria 5 600 120.00 Peter Wu 5 600 120.00 Edward William Tan 824 100,000 121.36 Edwin William Tan 412 50,000 121.36 Brent Oil Corporation 2,884 2 0.000693 Total 530,238 ====== 2. Donor's Tax The transfer by the absorbed corporations of their assets and liabilities to FBRI for the latter's shares is not subject to donor's tax. The absorbed corporations and their stockholders have no intention to donate their assets to FBRI since the said transfer was effected purely for legitimate business reasons (BIR Ruling No. DA-401-98 dated September 3, 1998) . 3. DST No DST shall be due on the transfer of the absorbed corporations' properties to FBRI in accordance with Section 199 (m) of the Tax Code, as amended by RA No. 9243, in relation to Section 40 (C) (2) of the Tax Code, as amended. ICcDaA However, DST at the rate of P1.00 on each P200 par value, or fractional part thereof, shall be imposed on the original issuance of shares by FBRI to FLI and BOC for the conversion of advances into equity and to the stockholders of the absorbed corporations as a consequence of the merger as provided under Section 174 of the Tax Code, as amended. Likewise, all the outstanding shares of the absorbed corporations which will be retired or cancelled as a consequence of the merger are not subject to DST. In various BIR rulings, the BIR has ruled that no DST shall be due upon the surrender by the stockholders of shares of stock for retirement/cancellation made pursuant to a merger (BIR Ruling Nos. DA-371-06 dated June 15, 2006, S-40-013-2006 dated May 26, 2006 and S-40-058-02 dated April 18, 2002). 4. VAT The transfer of the assets by the absorbed corporations to FBRI pursuant to the Plan of Merger is not subject to VAT. Moreover, any unused input tax belonging to the absorbed corporations as of the effective date of the merger will be absorbed by FBRI. FBRI may apply said input VAT as a credit against its output VAT liabilities (BIR Ruling No. 030-99 dated March 12, 1999). This is in accordance with Section 4.106-8 (b) (3) of RR No. 4-2007, amending RR 16-2005. Pertinent portions of RR No. 4-2007 read: "SEC. 4.106-8. Change or Cessation of Status as VAT-registered Person. xxx xxx xxx (b) Not subject to output tax The VAT shall not apply to goods or properties existing as of the occurrence of the following: xxx xxx xxx 3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed by the surviving or new corporation." Based on the June 30, 2007 Audited Financial Statements of the absorbed corporations, the total accumulated unutilized input tax, are as follows: Unutilized Input Tax FBOC P11,949,811 CNG 889,829 FBFC - Marquinton - Superbowl - Pancake - Cinema - Total P12,839,640 ========== Moreover, the exchange of properties pursuant to the merger is not a disposition or exchange of properties "in the course of trade or business" as defined under Section 105 of the Tax Code, as amended, and is, therefore, not subject to VAT (BIR Ruling No. 112-96 dated October 25, 1996). 5. Excess and Unutilized Creditable Withholding Taxes The excess and unutilized creditable withholding taxes are among the assets of the absorbed corporations which shall be transferred as a consequence of the merger to FBRI upon the effective date of merger. Being the surviving corporation, FBRI absorbs the juridical personality of the absorbed corporations and acquires all their rights and obligations. Accordingly, FBRI may apply the excess and unutilized creditable withholding taxes of the absorbed corporations as of the Effective Date of Merger as a tax credit against its income tax due for taxable year 2007 and succeeding years, or file a claim for refund or application for the issuance of tax credit certificate (TCC) therefore (BIR Ruling No. S-40-022-2007 dated August 22, 2007). Notably, in Rhone-Poulenc Rorer Philippines, Inc. vs. Commissioner of Internal Revenue, (C.T.A. Case No. 4869, April 3, 1996), the CTA ruled that by virtue of the merger by and between Rhone-Poulenc Nattermann Pharma, Inc. (the "RP Nattermann") and Rhone-Poulenc Rorer Philippines, Inc. (the "RP Rorer"), the excess tax paid by RP Nattermann forms part of the assets acquired by RP Rorer as the surviving corporation, hence, RP Rorer may file a suit for the judicial refund of said overpaid income tax. 6. Excess MCIT Credits The excess MCIT of the absorbed corporations as of the effective date of merger shall inure to the benefit of FBRI. Based on the June 30, 2007 Audited Financial Statements of the absorbed corporations, the total MCIT which are available for application against the regular corporate income tax, are as follows: MCIT FBOC P644,662 CNG 427,944 FBFC - Marquinton - Superbowl - Pancake - Cinema - Total P1,072,606 ========= In BIR Ruling No. DA-017-02 dated February 7, 2002, citing BIR Ruling No. 137-99 dated August 31, 1999, this Office had the occasion to rule that the excess MCIT of ABCC, GFI, VTCSI, TAPDMI and EPIC as absorbed corporations may be transferred to and vested in ABCI, as the surviving corporation on the effective date of the merger. This Office further held that the excess MCIT of the absorbed corporations may be carried forward and credited against the normal income tax due of ABCI, as the surviving corporation, for the three (3) immediately succeeding taxable years pursuant to said Section 27 (E) (3) of the said Code. 7. NOLCO In BIR Ruling No. DA-017-02 dated February 7, 2002, the BIR ruled that the NOLCO balance of the absorbed corporations are among the rights, privileges, properties and/or interests that will be transferred to and vested in the surviving corporation upon the approval of the merger by the SEC. While, pursuant to the merger, FBRI shall acquire the NOLCO balances of the absorbed corporations, it will only be able to utilize said NOLCO balances if there has been no substantial change in the ownership of the business or enterprise, i.e., the absorbed corporations will gain control of at least 75% or more in nominal value of the outstanding issued shares or paid up capital of FBRI, as provided under Section 34 (D) (3) of the Tax Code, as amended, viz.: SCHcaT "(3) Net Operating Loss Carryover. The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that (i) Not less than seventy -five percent (75%) in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy -five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons." In determining whether there is a substantial change in the ownership of the business, the ownership of shares held by a corporation should be traced to its ultimate beneficial owners because Section 34 (D) (3) of the Tax Code, as amended, explicitly provides that there is no substantial change in the ownership of the business if not less than 75% of the nominal value or paid-up capital of the corporation (if the business is in the name of a corporation) is "held by or on behalf of the same persons". The phrase "held by or on behalf of the same persons" in the above-quoted Section 34 (D) (3) of the Tax Code, as amended, encompasses not only ownership that is directly held by, or is in the name of, a person, but also ownership that is indirectly held on behalf of, or for, that person. Consequently, the implication from the use of the phrase "on behalf of the same persons" is that the law requires ownership to be traced through corporate tiers to the ultimate beneficial owners. In the case of FBRI, the 75% equity rule has been duly complied with, before and after the merger. Prior to the merger, FLI and BOC, the major stockholders, own 90% of FBOC, CNG and FBFC, and 100% of FBRI, Pancake, Marquinton, Superbowl and Cinema. After the merger, FLI and BOC will own 95.53% of FBRI, the surviving entity. Subject therefore to factual verification that the statutory merger of FBRI, FBOC, CNG, Marquinton, Superbowl, FBFC, Pancake and Cinema, does not result in an effective change in ownership of the business or enterprise, the unutilized and unexpired NOLCO's of FBOC, CNG, Marquinton, Superbowl, FBFC, Pancake and Cinema, if any, shall be transferred to and vested in FBRI by operation of law pursuant to the statutory merger of the corporations and may be claimed by FBRI as a deduction from gross income for the remainder of the three-year period counted from the year the NOLCO was incurred (BIR Ruling DA-576-07 dated November 6, 2007). Based on the Audited Financial Statements of the absorbed corporations dated June 30, 2007, the total NOLCO which are available for applications against future taxable income, are as follows: NOLCO FBOC - CNG - FBFC P468,958 Marquinton 2,300,000 Superbowl 4,320,250 Pancake 2,402,222 Cinema 11,216,889 Total P20,708,319 ========== Further, in order that the above-described reorganization can be considered as merger under Section 40 (C) (2) of the Tax Code, as amended, 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: 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 properties, 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; and 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, who is 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 gain or loss upon such exchange including: DIcTEC 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 the stock or securities and other property or money received from the exchange, including any liability assumed upon the exchange, and any liability 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 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 liability assumed on the exchange, or any liability 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, Prentice Hall 1963, ed., p. 9611) Finally, the parties shall cause the Register of Deeds to annotate on the Transfer Certificates of Title, the original or historical cost of acquisition of the properties, the date the transaction takes place and the fact that no gain or loss was recognized as a result of the merger, provided, however, that any violation by the Register of Deeds of the provisions of Section 58 (E) of the Tax Code, as amended, shall be subject to penalties under Section 269 of the said Code. The surviving corporation shall likewise cause the annotation at the back of the Certificates of Stock, the substituted basis of the transferred shares of stock, and the fact that no gain or loss was recognized as a result of the merger, the date the transaction (merger) takes place and the historical cost of acquisition of the shares transferred. In addition to the foregoing requirements, the parties shall enclose with their respective income tax returns for the taxable year in which the merger occurred a copy of the request for ruling filed with, and the corresponding ruling issued by, the Bureau of Internal Revenue, both duly stamp-received by the appropriate office of the Bureau of Internal Revenue. Such parties shall include as a note to their respective audited financial statements for the taxable year in which the merger occurred a statement to the effect that they hold such assets/shares acquired in a merger and the year in which such merger occurred, and in the taxable years, until the subject properties are subsequently transferred to another transferee. Violation of the above requirements is subject to the penalties provided in Sections 269 and 275 of the Tax Code of 1997, as amended. 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 is not complied with, then this ruling shall be considered null and void. aHcACI Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service