Transfer of Assets and Liabilities Solely in Exchange for Shares of Stock Shall Not Give Rise to the Recognition of Gain or Loss

April 18, 1991 BIR RULING NO. 064-91 34 (c) (2) 237-89 064-91 Gentlemen : This refers to your letter dated October 11, 1989 requesting, in effect, a ruling confirming your opinion that no gain or loss shall be recognized in the merger of E.S. Garcia Development Corporation (ESGAR), Amarem Realty Corporation (AMAREM) and Chemical Industries of the Philippines, Inc. (CIP), with your CIP, as the surviving corporation under Section 34(c) (2) of the Tax Code, as amended. cdt It is represented that ESGAR is a domestic corporation established and organized on February 7, 1967 for the Primary purpose of: "To engage in agriculture, to cultivate and develop farm land for the production of rice and other staple crops; to own, use, acquire, buy, sell, exchange, assign, cede, transfer, lease, possess, administer all kinds of said properties, to erect or cause to erected or constructed houses, storage, buildings, tenement and other structures of any kind or description with appurtenances thereto indispensable in the operation and maintenance and the purpose therein above-mentioned and to improve all kinds of agricultural properties of the corporation or other similar properties put under its control and do all such are usually done in the maintenance, operation and development of the same." that AMAREM is likewise a domestic corporation established and organized on April 18, 1975 for the primary purpose of: "To acquire by purchase or lease, or otherwise, lands and interest in land, and to own, hold, improve, develop, subdivide and manage any real estate so acquired and to erect or cause to be erected on any lands owned, held or occupied by the corporation, buildings or other structures with their appurtenances, including but not limited to residential, commercial and industrial buildings, condominiums, plants, factories and similar structures, and to rebuild, enlarge, alter and improve any such buildings and structures, and to mortgage, sell, lease or otherwise dispose any lands or parts thereof of any buildings or other structures at any time owned or held by the corporation." cdta that you are likewise a domestic corporation established and organized on December 22, 1936 for the primary purpose of: "To invest in, hold, own, purchase and otherwise acquire interests in corporations, associations, and other entities engaged in the development and business of the chemical industry, its allied industry as well as in agricultural and commercial enterprise; and to provide management, corporate planning, marketing, research and development, technical support and other services necessary as convenient in and about the conduct and operation of the business of such industries and enterprises." that ESGAR has an authorized capital stock of P2,000,000.00 divided into 20,000,000 shares of stock and consisting of 15,000,000 preferred and 5,000 common shares with a par value of P100.00 per share; that the capital structure of ESGAR is as follows: AUTHORIZED: Preferred: P1,500,000 Common: 500,000 ISSUED: Preferred P1,000,500 Common: 500,000 PAR VALUE: P100.00 per share STOCKHOLDERS: A. Common Chemical Ind. of the Phils. 4,995 Antonio M. Garcia 1 (CIP Nominee) Eusebio M. Garcia 1 (CIP Nominee) Ramon M. Garcia 1 (CIP Nominee) Manuel M. Garcia 1 (CIP Nominee) Ana Ma. G. Ordoveza 1 (CIP Nominee) Total 5,000 shares of a total x par value of P500,000.00. B. Preferred CIP 10,005 shares or a total par value of P1,000,500.00 that all subscriptions of common and preferred shares are fully paid; that AMAREM has an authorized capital stock of P10,000,000.00 dividend into 100,000 shares of stock with a par value of P100.00 per shares; that the capital structure of AMAREM is as follows: AUTHORIZED: P10,000,000.00 ISSUED: 3,661,800.00 STOCKHOLDERS AS OF AUGUST 31, 1989: Chemical Ind. of the Phils., Inc. 36,612 Antonio M. Garcia 1 Ramon M. Garcia 1 Eusebio M. Garcia 1 Manuel M. Garcia 1 Ana Ma. G. Ordoveza 1 Carmelita G. Salgado 1 Total 36,618 shares with a total par value of P36,661,800.00 that all subscriptions to common shares are fully paid; that you have an authorized capital stock of P190,000,000.00 divided into 1,900,000 shares with a par value of P100.00 per share; that your capital structure is as follows: AUTHORIZED P190,000,000.00 ISSUED 102,966,010 PAR VALUE 10.00 per share STOCKHOLDERS 111 stockholders owning a total of 10,296,601 that all your present shareholders have fully paid their respective subscriptions; that no shares were actually issued by you to the stockholders of ESGAR and AMAREM for the simple reason that you, CIP, are the sole owner of the shares of stock of ESGAR and AMAREM, the other shareholders being merely your nominees/representatives; that as a result of the merger, ESGAR and AMAREM shall cease to exist as corporation by operation of law and you shall remain as the surviving corporation and continue the activities and functions of both ESGAR and AMAREM; and that the foregoing merger is being effected with the end in view of accomplishing greater efficiency and economy to the advantage and welfare of the said corporations and their respective shareholders. 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) of the Tax Code because you will acquire all the assets and assume all the liabilities of ESGAR and AMAREM solely for stocks, the proposed transaction to be undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. cdtech Accordingly, your opinion to the effect that the transfer by ESGAR and AMAREM of all their assets and liabilities to you solely in exchange for your shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 34(c) (2) of the Tax Code is hereby confirmed. No gain or loss shall be recognized to ESGAR and AMAREM upon your distribution of shares to ESGAR and AMAREM shareholders in complete redemption of their stocks under Section 34 (c) (2) of the Tax Code. No gain or loss shall be recognized to ESGAR and AMAREM stockholders upon the exchange of their stocks solely for your stocks under Section 34 (c) (2) of the Tax Code. The basis of the assets received by you shall be the same as it would be in the hands of ESGAR and AMAREM. The basis of your stocks received by the stockholders of ESGAR and AMAREM shall be the same as the basis of the ESGAR and AMAREM stocks surrendered in exchange therefore. If the total liabilities to be assumed by you upon effective merger dated exceed the historical or original acquisition cost (cost basis) of the assets transferred by ESGAR and AMAREM, the excess shall be recognized as gain of ESGAR and AMAREM [Section 34 (2) (4) (b), Tax Code, as amended by P.D. No. 1773] It is understood, however, that upon the subsequent sale of 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 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 corporations. Each corporation, which is a party to the reorganization, shall file, as part of its return for the taxable year within which the organization 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 gains 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 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. The parties shall also cause to be annotated on the Transfer Certificate of Titles and at the back of the Certificate of Stocks, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock involved, and the fact that no gain or loss was recognized as a result of such 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, than this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE U. ONG Commissioner