Income Tax Consequences of the Reorganization or Incorporation of William J. Suter "Morcoin" Co., Ltd.

February 15, 1960 BIR RULING NO. 099-60 Messrs. Sycip, Gorres, Velayo & Co. Certified Public Accountants P.O. Box, Manila Gentlemen : Reference is made to your letter dated October 24, 1959, requesting information as to the income tax consequences of the reorganization or incorporation being contemplated by your client, William J. Suter "Morcoin" Co., Ltd., under the following procedure: "On September 30, 1947, Messrs. William J. Suter and Gustav Carlson and Miss Spirig executed a contract of limited partnership under the firm name of 'Morcoin' Co., Inc.,' with Mr. William J. Suter as the general partner and Miss Julia Spirig and Mr. Gustav Carlson as limited partners. The partnership was organized for the purpose of engaging principally in the importation, sales, marketing, distribution and operation of automatic phonographs, radios, television equipment, battery-charged or electrically-operated amusement machines, parts and accessories. "Sometime in 1948, the general partner, Mr. William J. Suter, married Miss Julia Spirig. Then on December 18, 1948, Mr. Gustav Carlson sold his interest in the partnership to the spouses, Mr. and Mrs. William J. Suter. The sale was duly recorded and registered with the Securities and Exchange Commission. "Since its organization, the partnership has been filing its returns and paying income taxes as a corporation under the firm name 'William J. Suter 'Morcoin' Co., Ltd.,'. The Partnership has its own place of business, keeps its own books of account, has its own bank account and quota allocations with the Central Bank, and is transacting business with the general public as a limited partnership. Moreover, the partnership has been treated and taxes as a corporation under Section 24 of the Tax Code, in relation to Section 84(b) thereof. "The parties involved in the plan of reorganization are William J. Suter 'Morcoin' Co., Ltd. (hereinafter called the 'Partnership') and a corporation to be organized under our Corporation Law, as amended (hereinafter called the 'Corporation'). "Under the plan, the partners propose to incorporate the Partnership into a new Corporation under the Corporation Law, the new Corporation to be known under the name of 'Morecoin Co., Inc.' or such other name as may be lawfully used in the Philippines. The incorporators of the Corporation will consist of five (5) individuals, who will most probably be the partners of the Partnership and such other third parties (who will invest nominal stock of the new Corporation would be the Partnership for and in behalf of the partners and such third parties for qualifying purposes only. Substantial investments in the new Corporation will be made after incorporation. "After incorporation of the new Corporation, the Partnership then will transfer all its assets to the new Corporation solely in exchange for shares of stock of the new Corporation and all liabilities of the Partnership will be assumed by the new Corporation, subject, of course, to the conformity of the creditors of the former. Then shares of stock will be issued by the new Corporation to the Partnership for the account of, and thereafter immediately distributed to, the partners in proportion to their interest therein. No money or property whatsoever will be received by the partners of the Partnership except the shares of stock issued as aforestated by the new Corporation to the Partnership. "After the incorporation of the Partnership and the issuance of the shares of stock, the Partnership will thereupon cease to do business as a limited partnership, as it will be completely liquidated and dissolved. "The partners, in approving the proposed plan of incorporating the Partnership into a new Corporation, considered the need for additional capital to replace and modernize their coin-operated machines, which they believe are inadequate and impede the progress of the business. They also take into account that under the present set-up it is impracticable, if not impossible, to obtain additional capital from investors, without changing the organization of the Partnership. "By reorganizing or incorporating into a new Corporation, the Partnership hopes and expects that outside financing can be procured from the Philippine investors to help expand its operation. The resulting expansion of the Partnership's business will undoubtedly have the effect of increasing the taxes that would be collectible by the government from it. We believe that this contemplated reorganization of the Partnership of William J. Suter 'Morcoin' Co. Ltd., into a Corporation cannot have the effect of reducing the taxes which the Partnership ordinarily pays. Rather, the proposed plan is motivated by sound business reasons and that the principal purpose is to improve and expand the operations of the Partnership's business." In answer thereto, I have the honor to inform you that, under the procedure outlined above, the acquisition of all the assets of the "Partnership" by the 'Corporation" in exchange solely for shares of stock of the latter and its assumption of the liabilities of the "Partnership" constitutes a merger or consolidation within the meaning of section 35(c)(2) of the Tax Code, as amended by Republic Act No. 1921. No gain or loss will be recognized to the "Partnership" on the aforementioned exchange, pursuant to Section 35(c)(2)(a) of the same Code, the "Partnership" upon their receipt of the shares of the "Corporation," pursuant to section 35(c)(2)(b) of said Code. The basis of the stocks or shares to be received by the partners or the transferor "Partnership" in exchange for the stocks or shares issued by the transferee "Corporation" will be the cost or other basis to such partners of the stocks of the transferor and not the cost of the stocks or shares issued by the transferee. cdll Very truly yours, MELECIO R. DOMINGO Commissioner of Internal Revenue