Tax Consequence of the Transfer of Assets and Liabilities

February 1, 1989 BIR RULING NO. 011-89 34-c-2 372-88 011-89 Gentlemen : This refers to your letter dated December 19, 1988 stating that your clients, Uniden Corporation of the Philippines (UNIDEN) and Weston Corporation of the Philippines (WESTON) are both domestic corporations; that their entire outstanding capital stock are fully paid and owned by the following list of stockholders: cdtech UNIDEN NO. OF SHARES Uniden Electronics HongKong, Ltd. 1,974,725 Setsuzo Okamoto 4,996 Nobuya Hanzawa 1 Katsuhiko Hattori 1 Kazanori Sato 1 Takayoshi Haga 1 1,979,725 ========= WESTON NO. OF SHARES The Western Corporation 1,514,823 Japan Asean Investment Co. Investment Ent. Partnership 500,000 Sakari Suya 1 Minori Arae 1 Tushio Jibiki 1 Rockwell Perfecto Gohu 1 Yasoyuki Hachiga 1 2,014,828 ========= that pursuant to a plan of merger, WESTON transferred all its assets and liabilities to UNIDEN in exchange for new shares of UNIDEN stock; that UNIDEN issued and delivered to WESTON's stockholders, fully paid and non-assessable shares of the capital stock of UNIDEN on a one to one ratio, that is one UNIDEN share for every one WESTON share or a total of 2,014,828 shares; that the exchange ratio took into account the audited financial statement of UNIDEN and WESTON as of September 30, 1988; that it is represented that the liabilities of WESTON to be assumed by UNIDEN did not exceed the cost basis of the assets of WESTON to be transferred to UNIDEN; and that the merger is desirable and advantageous to UNIDEN and WESTON and their respective stockholders for the following reasons: (1) the business activities of the two companies being parallel and complementary, the merger will make possible a more productive use of the properties of the constituent corporations; (2) the consolidation of the assets of the two corporations will allow the procurement of financing and credit facilities under more favorable terms; (3) the integration of the administrative facilities of the two companies will result in greater economy of scale and efficiency of operations; (4) the merger will eliminate duplicate functions relating to parallel activities. In connection therewith, you now request confirmation of your opinion as follows: (1) No gain or loss shall be organized to UNIDEN and WESTON upon the transfer of the assets and liabilities of WESTON to UNIDEN pursuant to the merger. (2) No gain or loss shall be recognized to WESTON and their respective stockholders upon the issuance and distribution of UNIDEN's shares to them in complete redemption of their WESTON shares pursuant to the plan of merger; (3) The basis of the UNIDEM stock received by the stockholders of WESTON is the same as their basis in WESTON stocks surrendered and exchanged pursuant to the plan of merger; (4) The basis of the properties of WESTON in the hands of UNIDEN is the same as it would be in the hands of WESTON; (5) The transfer of assets by WESTON to UNIDEN for UNIDEN shares would not be considered as a transfer of property for an insufficient consideration subject to gift tax since there is no intention to donate on the part of any of the parties and the transaction is effected purely for business reasons. 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, UNIDEN acquired all the assets and assumed all the liabilities of WESTON solely for stocks, the transaction being undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by WESTON of all its assets and liabilities to UNIDEN solely in exchange for the latter's shares of stock shall not give rise to the reorganization of gain or loss pursuant to Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to WESTON upon the distribution of UNIDEN shares to WESTON stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to WESTON stockholders upon the exchange of their stocks solely for UNIDEN stock under Section 34(c)(2) of the Tax Code, as amended. The basis of the assets received by UNIDEN shall be the same as it would be in the hands of WESTON. The basis of UNIDEN stocks received by the stockholders of WESTON shall be the same as the basis of the WESTON stocks surrendered in exchange therefor. If the total liabilities to be assumed by UNIDEN upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by WESTON, the excess shall be recognized as gain to WESTON. (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. aisadc The abovementioned transactions shall not be subject to the gift tax as there is no intention to donate on part of any of the parties. However, in order that the above-described re-organization can be considered a 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-organization 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 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 properties 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 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 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-B, 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 stock received as a consequence of the merger. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner