Whether the Merger of ASB Realty Corporation (ASB) and Heritage Development Corporation (HDC) with ASB as the Surviving Corporation Qualifies as a Tax-Free Merger under Section 34(c) (2) of the Tax Code, as amended

February 22, 1991 BIR RULING NO. 030-91 34-c-2 225-89 030-91 Gentlemen : This refers to your letter dated June 8, 1990 requesting a ruling to the effect that the merger of ASB Realty Corporation (ASB) and Heritage Development Corporation (HDC) with ASB as the surviving corporation qualifies as a tax-free merger under Section 34(c) (2) of the Tax Code, as amended. cdt It is represented that ASB and HDC are both domestic corporation engaged in the realty business; that ASB and HDC will effect a statutory merger with ASB as the surviving corporation; that pursuant to the Plan of Merger, HDC will transfer all its assets and liabilities to ASB in exchange for new shares of the capital stock of ASB; that the new shares of stock will be issued directly to the stockholders of HDC; that the number of ASB shares to be issued to HDC's stockholders shall be based on the net transfer value of the assets conveyed to ASB i.e., assets less liabilities reflected in HDC's Financial Statement's as of December 31, 1989; that in exchange, the stockholders of HDC will surrender their HDC shares of stock to HDC which will completely redeem all its outstanding shares of stock in the hand of its stockholders and will go out of its corporate existence upon SEC approval of the merger; that the liabilities of HDC to be assumed by ASB do not exceed the cost basis of the assets of HDC to be transferred to ASB; that both ASB and HDC are operating at a net income position; and that the business activities of both companies are parallel and complementary. In connection therewith, you now request confirmation that: "1. The merger of ASB and HDC in which all the assets and liabilities of HDC will be transferred to ASB which will survive the merger qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 34(c) (2). Thus, no gain or loss shall be recognized to ASB and HDC upon the transfer of the assets and liabilities of HDC to ASB pursuant to the merger; "2. No gain or loss shall be recognized to HDC and its shareholders upon the issuance and distribution of ASB's shares to them in complete redemption of their HDC shares pursuant to the plan of merger; "3. The basis of the ASB shares of stock received by the stockholders of HDC shall be the same as their basis in HDC shares of stock surrendered and exchanged pursuant to the plan of merger; "4. The basis of the properties of HDC in the hands of ASB shall be the same as it would be in the hands of HDC; "5. The transfer of assets by HDC to ASB for ASB shares of stock will not be considered as transfer of property for an insufficient consideration subject to gift tax since there is no intention to donate on the part of either of the parties and the transaction is effected purely for business reasons." In reply, thereto, I have the honor to inform you as follows: (1) The above reorganization is a merger within the contemplation of Section 34(c)(2) and 5(b) of the Tax Code because a corporation (ASB) will acquire all the assets and assume all the liabilities of HDC solely for stocks, the transaction undertaken being for a bonafide business purpose and not solely for the purpose of escaping the burden of taxation; (2) No gain or loss shall be recognized to HDC upon the distribution of ASB shares to HDC stockholders in complete redemption of there stocks under Section 34(c) (2) of the Tax Code; (3) The basis of the assets received by ASB shall be the same as it would be in the hands of HDC. The basis of ASB stocks received by the stockholders of HDC shall be the same as the basis of the HDC stocks surrendered in exchange therefor; (4) The above mentioned transactions shall not be subject to the gift tax as there is no intention to donate on the part of any of the parties. Moreover, if the total liabilities to be assumed by ASB, upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by HDC, the excess shall be recognized as gain of HDC (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. 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, 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 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 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. 9803-8, 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 stock received as a consequence of the merger. 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. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner