Merger - No Gains, Losses

February 10, 1993 BIR RULING NO. 063-93 MERGER NO GAINS, LOSSES 34 (c) (2) 237-89 063-93 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati, Metro Manila Attention: Atty . T . A . Tejada Tax Division This refers to your letter dated September 3, 1992 requesting a ruling on the tax consequence of the merger of your clients, State Land Investment Corporation (SLIC), Stateland Realty Development Corporation (SLRDC) and Stronghold Realty Development Corporation (STRDC). It is represented that SLIC, SLRDC and STRDC are all domestic corporations duly organized and existing under and by virtue of Philippine laws and are all engaged in the real estate business; that at present, SLIC has an authorized capital stock of P60,000,000 divided into 6,000,000 common shares with a par value of P10 per share; that of the total authorized capital stock, 3,031,225 shares, with a total par value of P30,312,250 have been subscribed and paid for; that as of July 31, 1992, SLRDC has total assets of P121,307,224.00, total liabilities of P119,864,365.00, thus leaving a net asset value of P1,442,859.00; that SLRDC has an authorized capital stock of P4,000,000 divided into 400,000 shares with a par value of P10.00 per share; that of the total authorized capital stock, 100,005 shares, with a total par value of P1,000,050 have been subscribed and paid for by the following: Name of Stockholder No. of Shares SLIC 100,000 Vienvenido S. Uy (SLIC nominee) 1 Mary C. Go (SLIC nominee) 1 Lydia M. Lim (SLIC nominee) 1 Susana C. Monzon (SLIC nominee) 1 Francisco K. Chua (SLIC nominee) 1 Total 100,005 ====== that as of July 31, 1992, STRDC has total assets of P145,773,827.00, total liabilities of P55,252,990.00, leaving a net asset value of P90,520,837.00; that STRDC has an authorized capital stock of P110,000,000 divided into 11,000,000 shares with a par value of P10 per shares; that of the total authorized capital stock, 10,830,675 shares, with a total par value of P108,306,750 have been subscribed and paid for; that for the purpose of consolidating their operations in order to ensure their viability and competitiveness and to realize economies in operations, SLIC, SLRDC and STRDC executed a Plan of merger whereby SLIC will be surviving corporation and SLRDC and STRDC will be the absorbed corporations; that pursuant to the Plan of merger, SLIC as the surviving corporation will, upon the effectivity date of the merger, acquire/assume all the assets, franchises, licenses, powers, rights, interests, titles, equities, privileges, immunities and liabilities of SLRDC and STRDC; that in exchange for the transfer by SLRDC and STRDC to SLIC of all their assets and liabilities, SLIC will issue to all stockholders of SLRDC and STRDC shares of its own capital stock, as follows: a) To SLRDC stockholders No SLIC shares shall be issued since SLRDC is wholly-owned by SLIC and by SLIC nominees; b) To STRDC stockholders The surviving corporation, in consideration of the net assets of STRDC, will apply the amount of P83,423,228 (net of the value of SLIC shareholdings in the absorbed corporation), as partial payment for the subscription of the stockholders of the absorbed corporation amounting to P85,000,000.00; that as a consequence of the merger, SLIC will increase its authorized shareholdings in the absorbed corporation), as partial payment for the subscription of the stockholders of the absorbed corporation amounting to P85,000,000.00; that as a consequence of the merger, SLIC will increase its authorized capital stock from the present P60,000,000.00 to P400,000,000.00 divided into 40,000,000 common shares with a par value of P10 per share. that as a result of the merger, SLRDC and STRDC will cease to exist as corporations by operation of law, and the stockholders of SLRDC and STRDC will be deemed stockholders of SLIC; that each holder of an outstanding certificate of stock of SLRDC and STRDC will surrender the same duly endorsed, to SLIC for cancellation and each such holder will then receive the certificates of stock representing the appropriate number of SLIC shares. In connection therewith you now request confirmation of your opinion that "1. The above described reorganization is a merger within the contemplation of Section 34(c)(2) and 6(b) of the Tax Code, because SLIC will acquire/assume all the assets and liabilities of SLRDC and STRDC, solely in exchange for shares of stock of SLIC, and because the reorganization is being undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation . . .; "2. No gain or loss shall be recognized "(a) To both SLRDC and STRDC, the transferors, and SLIC, the transferee, on the transfer by SLRDC and STRDC of all their respective assets and liabilities to SLIC, in exchange for SLIC shares, pursuant to the merger; "(b) To both SLRDC and STRDC on the distribution of the SLIC shares to SLRDC and STRDC stockholders, in complete redemption of their stocks, pursuant to the merger; and "(c) To the stockholders of both SLRDC and STRDC on the exchange of their shares of stock of SLRDC and STRDC solely for SLIC shares, pursuant to the merger in accordance with Section 34(c)(2) of the Tax Code; "3. The basis of the SLIC stock received by the stockholders of SLRDC and STRDC is the same as their basis in the SLRDC and STRDC stock surrendered in exchanged pursuant to the plan of merger; "4. The basis of the assets received by SLIC shall be the same as it would be in the hands of SLRDC and STRDC; "5. The transfer of assets and liabilities by SLRDC and STRDC to SLIC in exchange solely for its shares will not be considered as transfer of property for 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; "6. For value-added tax (VAT) purposes, the transfer of the assets, including tangible and movable properties, by SLRDC and STRDC to SLIC pursuant to the merger will not be subject to any output tax, and any unused input tax of SLRDC and STRDC as of the effective date of the merger, will be absorbed by SLIC as the surviving corporation, pursuant to Section 5(b)(3) of Revenue Regulations No. 5-87 . . .; "7. The original issues of the certificates of stock of SLIC to STRDC stockholders will be subject to the documentary stamp tax imposed by Section 175 of the Tax Code; "8. The transfer of title to the real properties will be subject to the documentary stamp tax imposed by Section 196 of the Tax Code." 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, SLIC will acquire all the assets and assume all the liabilities of SLRDC and STRDC 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. Accordingly, the transfer by SLRDC and STRDC of all their assets and liabilities to SLIC 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 Tax Code. No gain or loss shall be recognized to SLRDC and STRDC upon the distribution of SLIC shares to SLRDC and STRDC stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to SLRDC and STRDC stockholders upon the exchange of their stocks solely for SLIC stocks under Section 34(c)(2) of the Tax Code, as amended. The basis of the assets received by SLIC shall be the same as it would be in the hands of SLRDC and STRDC. The basis of SLIC stocks received by the stockholders of SLRDC and STRDC shall be the same as the basis of the SLRDC and STRDC stocks surrendered in exchange therefor. If the total liabilities to be assumed by SLIC upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by SLRDC and STRDC, the excess shall be recognized as gain to SLRDC and STRDC (Section 34(c)(4)(b) Tax Code, as amended by P.D. No. 1773). Moreover, your opinion to the effect that (1) That the transfer of the assets, including tangible and movable properties, by SLRDC and STRDC to SLIC pursuant to the merger will not be subject to the value-added tax and any unused input tax of SLRDC and STRDC as of the effective date of the merger, will be absorbed by SLIC as the surviving corporation, pursuant to Section 5(b)(3) of Revenue Regulations No. 5-87; (2) That the original issues of the certificates of stock of SLIC to STRDC stockholders will be subject to the documentary stamp tax imposed by Section 175 of the Tax Code; (3) That the transfer of the real properties will be subject to the documentary stamp tax imposed by Section 196 of the Tax Code, as amended, are hereby confirmed. 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. cd 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 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 occurred a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including: cdta (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 all 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 of 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, 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 subsequent disposition of such stock or securities and other property received from the exchange. (par. 9803-8, F-H 963, 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. aisadc JOSE U. ONG Commissioner of Internal Revenue