Merger — Tax Free Exchange

January 18, 1993 BIR RULING NO. 038-93 MERGER TAX FREE EXCHANGE 34 (C-2) 225-89 038-93 Joaquin Cunanan & Co. 8th Floor, BA-Lepando Building 8747 Paseo de Roxas, Makati Metro Manila Attention: Rene G . Baez Tax Principal This refers to your letter dated 27 April 1992 requesting a ruling to the effect that the contemplated merger of your clients, Bristol Laboratories (Philippines), Inc. and E.R. Squibb & Sons Philippines Corporation, with Bristol as the surviving corporation qualifies as a tax-free merger under Section 34(c)(2) of the Tax Code, as amended. cdtech It is represented that your clients are both engaged in the business of manufacturing and distributing vitamins, pharmaceutical, and consumer products; that both companies are now under the common control of Bristol-Myers Company U.S.A.; that since both your clients are owned and controlled by the same parent company, merger becomes necessary in order to realize economies in operations and management, with Bristol as the surviving corporation; that pursuant to the Plan of merger, Squibb will transfer its assets and liabilities to Bristol in exchange for new shares of the capital stock of Bristol; that the resulting exchange ratio is 14.28 share of Bristol per one (1) share of Squibb or a total of 55,147 shares; that all fractional shares shall be paid for in cash on the basis of the par value of Bristol shares; and that the liabilities of Squibb to be assumed by Bristol will not exceed the cost basis of the assets of Squibb that are to be transferred to Bristol. In connection therewith, you now request confirmation that: "1. No gain or loss shall be recognized to Bristol and Squibb upon the transfer of the assets and liabilities of Squibb to Bristol pursuant to the merger; "2. No gain or loss shall be recognized to Squibb and their respective stockholders upon the distribution of Bristol shares to them in complete redemption of their Squibb shares pursuant to the plan of merger; "3. The basis of the properties of the Bristol stock received by the stockholders of Squibb is the same as their basis in Squibb stocks surrendered in exchange therefore pursuant to the merger; "4. The basis of the properties of Squibb in the hands of Bristol is the same as it would be in the hands of Squibb; and "5. The transfer of assets by Squibb to Bristol for Bristol shares would 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 any 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)(c) and 5(b) of the Tax Code, as amended because a corporation (Bristol) will acquire all the assets and assume all the liabilities of Squibb solely for stocks, the transaction undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation; 2. The transfer by Squibb of all its assets and liabilities to Bristol solely in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 34(c)(2) of the said Code. No gain or loss shall be recognized to Squibb upon the distribution of Bristol shares to Squibb stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code; 3. The basis of Bristol stocks received by the stockholders of Squibb shall be the same as the basis of the Squibb stocks surrendered in exchange therefor; 4. The basis of the assets received by Bristol shall be the same as it would be in the hands of Squibb; 5. Moreover, the above mentioned transactions shall not be subject to the gift tax as there is no intention to donate on the part of the parties. If the total liabilities to be assumed by Bristol upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by Squibb, the excess shall be recognized as gain by Squibb (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 said 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-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 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, 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 participated 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 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, then this ruling shall be considered null and void. cd i JOSE U. ONG Commissioner of Internal Revenue