BIR Ruling No. 020-83

February 14, 1983 BIR RULING NO. 020-83 Gentlemen : This refers to your letter dated January 25, 1983 requesting confirmation of your opinion to the effect that the proposed merger of Filinvest Development Corporation (FDC) and Filinvest Land Incorporated (FLI), qualifies as a tax free reorganization under Section 35(c)(2) of the Tax Code, as amended. It is represented that FLI is a real estate company while FDC is an investment company, likewise engaged in real estate business; that FLI is a wholly-owned subsidiary of FDC; that the proposed merger of the two companies is motivated, among others, by the following reasons: (1) the merger shall strengthen the capital base of the new corporation; (2) the merger shall combine the assets of the constituent corporations thereby resulting in increase financial strength and probability of more profitable operations; (3) the merger shall simplify operations and thus, effect operating economies by eliminating duplication of effort, facilities and personnel, the prevention of waste and the saving of time; and (4) conflicts of interest among the constituent corporations will be avoided; that the authorized capital stock of FDC is two hundred thirty million pesos (P230,000,000.00), consisting of 23,000,000 shares, with a par value of ten pesos (P10.00) each divided into 50,000 8% cumulative preferred shares, 150,000 12% cumulative preferred shares, 16,000,000 Common A Shares and 6,800,000 Common B Shares; that of the aforesaid authorized capital stock of FDC 5,209,555 shares are outstanding, divided into 1,720 12% cumulative preferred shares, 5,108,204 Common A shares and 99,631 Common B shares; that the authorized capital stock of FLI is Sixty Million Pesos (P60,000,000.00), consisting of 6,000.00 shares with a par value of P10.00 each; that of the aforesaid authorized capital stock of FLI 1,370,852 shares are outstanding; that all the assets and liabilities of FLI shall be transferred to FDC in exchange for the shares of stock of the latter; that the stockholders of FLI will surrender their FLI shares, and in exchange therefor, will receive shares of stock of FDC in complete redemption of their FLI shares; that the corporate life of FLI will be shortened to complete the process of merger; that FDC shall be the surviving corporation; and the business of FLI will be continued and pursued by FDC. In reply, 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. acd Accordingly, the transfer by FLI of all of its assets and liabilities to FDC 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 FLI upon the distribution of FDC shares to FLI stockholders in complete redemption of their stocks under Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to FLI stockholders upon the exchange of their stocks solely for FDC stocks under Section 35(c)(2) of the Tax Code. The basis of the assets received by FDC shall be the same as it would be in the hands of FLI. The basis of FDC stocks received by the stockholders of FLI shall be the same as the basis of the FLI stocks surrendered in exchange therefor. If the total liabilities to be assumed by FDC upon effective merger date exceed the original or acquisition cost (cost basis) of the assets transferred by FLI, the excess shall be recognized as gain by FLI. (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 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 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, to 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 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 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 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-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