BIR Ruling No. 008-83

January 13, 1983 BIR RULING NO. 008-83 Gentlemen : This refers to your letter dated February 20, 1982 requesting confirmation of your opinion to the effect that the proposed merger of your clients, Great Pacific Life Assurance Corporation (Grepalife) and GPL Equities, Inc. (GPL) qualifies as a tax-exempt reorganization under Section 35(c)(2) of the Tax Code. cdti It is represented that Grepalife is a domestic corporation duly registered to engage in the business of life insurance in the Philippines; that 91.8% of its equity is owned by GPL, another domestic corporation; that prompted by the desire of the companies to achieve efficiency and economy of operation by reducing administrative and operating costs and to strengthen Grepalife, a merger has been proposed wherein GPL will transfer all of its assets and liabilities to Grepalife solely in exchange for the latter's shares of stock; that Grepalife shares will be issued to GPL stockholders solely in exchange for their stockholdings in GPL; and that as a result of the merger, Grepalife will be the surviving corporation and GPL will then cease to exist. In reply thereto, I have the honor to inform you that the above reorganization is a merger within the contemplation of Section 35(c)(2) and 5(b) of the Tax Code because a corporation acquires all of the properties of another corporation solely for stocks, the transaction to be undertaken being for a bonafide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by GPL of all of its assets and liabilities to Grepalife solely, in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to GPL upon the distribution of Grepalife shares to GPL stockholders in complete redemption of their stocks under Section 35 (c)(2) of the Tax Code. No gain or loss shall be recognized to GPL stockholders upon the exchange of their stocks solely for Grepalife stocks under Section 35(c) (2) of the Tax Code. The basis of the assets received by Grepalife shall be the same as it would be in the hands of GPL. The basis of Grepalife stocks received by the stockholders of GPL shall be the same as the basis of the GPL stocks surrendered in exchange therefor. If the total liabilities to be assumed by Grepalife upon effective merger date exceed the original or acquisition cost (cost basis) of the assets transferred by GPL, the excess shall be recognized as gain of GPL. (Sec. 35(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 of exchange shall be subject to income tax. cdta 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 a merger under Section 35(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, a party to a 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 purpose thereof and in detail all transaction incident to, or pursuant to the plan. (2) A complete statement of the cost or other basis of all property, including all stock 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 distributions 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 gain 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 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 for 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-B, P-H 1963 ed., p. 9611) In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporations 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 stock received as a consequence of the merger. cdtech Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner Bureau of Internal Revenue