Tax Consequence of the Proposed Consolidation of Several Domestic Corporations Into One Corporation

June 14, 1995 BIR RULING NO. 087-95 34 (c) (2) 000-00 087-95 Odyssey CD's & Tapes Unit 12-C Strata 200 Bldg. Emerald Avenue, Ortigas Center Pasig City Attention: Mr . Lawag B . Fonacier, Jr . Gentlemen : This refers to your letter dated April 18, 1995 requesting a ruling on the tax consequence of the proposed consolidation of the following domestic corporations, namely, Chrism Development Corporation, Kerrisdale, Inc., Beats International, Inc., Timmery Development Corporation, Nordstar Sound, Inc., Lake Crest, Inc., Ladehurst Development Corporation and Sonorous, Inc. (Constituent Corporation) into one corporation under the name of Mega Music, Inc. (Consolidated Corporation). It is represented that the aforementioned corporations are all engaged in the same business of manufacturing, importing, exporting, buying, selling, distributing and trading articles of commerce and industry, such as but not limited to records, cassettes, tapes, betamax tapes and films, 8-tract cartridges, speakers, turntables and similar and related products and accessories which are or may become articles of commerce; that they have several common stockholders and managed by interlocking directors and officers and commonly operate under the business name and style of Odyssey CD's and Tapes; that the aforementioned corporations desire to consolidate under the name of Mega Music, Inc. for the following purposes: (a) to strengthen the capital base of the consolidated corporation; (b) to eliminate possible conflicts of interest between the constituent companies since all functions will be directly managed by one body and be guided by a unified corporate objective; (c) to obtain operating economies and efficiencies since all departments with similar functions would be combined; and (d) to be able to offer a broader and more complete range of services and products to clients and customers; that the aforesaid corporations have agreed to consolidate with one another under the following terms and conditions: (1) upon approval of the consolidation by the Securities & Exchange Commission, the separate corporate personality of all the participating corporations shall be dissolved and the consolidated corporation shall thereupon and thereafter possess all the rights, privileges and immunities and franchises of each of the participating corporations, and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other chooses in action, and all and every other interest of or belonging to or due to each participating corporation shall be taken and deemed to be transferred to and vested in the consolidated corporation; (2) the consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the participating corporations in the same manner as if such consolidated corporation had itself incurred such liabilities or obligations, and any claim, action or proceeding pending by or against any of the participating corporations may be prosecuted by or against the consolidated corporation, but in no event shall the respective liabilities of the constituent corporations to be assumed by the consolidated corporation exceed the cost basis of the respective assets of the constituent corporations to be transferred to the consolidated corporation; that upon approval of the consolidation by the Securities & Exchange Commission, the consolidated corporation shall immediately make available shares of stock with aggregate par value equivalent to the constituent corporations preconsolidation net worth based on their respective audited financial statements as of December 31, 1994. In connection therewith, you are requesting confirmation of your opinion that "A. The transactions described above, including the transfer and conveyance of all the assets and liabilities of the constituent corporations to the consolidated corporation in exchange for shares of stock of the consolidated corporation, constitute a "consolidation" within the meaning of Section 34(c) (2) and (c) (6) (b) of the National Internal Revenue Code. "B. No gain or loss will be recognized to the constituent corporations upon the transfer and conveyance of their assets to the consolidated corporation, and upon the assumption by the consolidated corporation of the constituent corporations' liabilities, obligations and undertakings in exchange solely for the issuance of the consolidated corporation's stock directly to constituent corporations' shareholders pursuant to the Plan of Consolidation. cdll "C. No gain or loss will be recognized to the constituent corporations' shareholders upon their receipt of the consolidated corporation's stock in exchange for the constituent corporations' shares. "D. No gain or loss will be recognized to the consolidated corporation upon its receipt of the assets transferred by the constituent corporations and its assumption of the liabilities, undertakings and obligations of the constituent corporations, as well as upon the issuance by the consolidated corporation of its shares of stock to the constituent corporations' shareholders who shall surrender their constituent corporations' stock to the consolidated corporation, pursuant to the Plan of Consolidation. "E. No capital gains tax on stock transaction under the provisions of Section 22(e) (2) (A) or 21 (d) (1), as the case may be, of the National Internal Revenue Code is payable either by the consolidated corporation or the constituent corporations' shareholders upon the issuance by the consolidated corporation of its shares to the constituent corporations' shareholders who shall surrender their constituent corporations' stock to the consolidated corporation. "F. No gift tax is payable by the constituent corporations or the consolidated corporation or constituent corporations' shareholders upon the transactions and exchange made pursuant to the Plan of Consolidation. In reply thereto, please be informed that your opinion to the effect that the above reorganization is a consolidation within the contemplation of Section 34(c) (2) and 6(b) of the Tax Code because all the constituent corporations shall coalesce and cease to exist as separate corporations and a new corporation, the consolidated corporation, Mega Music, Inc. comes into being; and that all the assets and liabilities of the constituent corporations shall be transferred to the consolidated 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, is hereby confirmed. Accordingly, the transfer by the constituent corporations of all their assets and liabilities to the consolidated corporation 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 of loss shall be recognized to the Constituent Corporations' stockholders upon the exchange of their stocks solely for the Consolidated Corporation stocks under Section 34 (c) (2) of the Tax Code. The basis of the assets received by the Consolidated Corporation shall be the same as it would be in the hands of the Constituent Corporations. The basis of the Consolidated Corporation stocks received by the stockholders of the Constituent Corporation shall be the same as the basis of the Constituent Corporations stocks surrendered in exchange therefor. If the total liabilities to be assumed by the Consolidated Corporation upon effective consolidation date exceed the historical or original acquisition cost (cost basis) of the assets transferred by the Constituent Corporations, the excess shall be recognized as gain of the Constituent Corporations (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. The abovementioned transaction 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 consolidation under Section 34(c) (2) of the Tax Code, the parties to the consolidation 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: llcd (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 corporation participating in the consolidation 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 consolidation. 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. LexLib Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue