Tax Consequence of the Transfer by CMC of All Its Assets and Liabilities

May 26, 1989 BIR RULING NO. 112-89 34 (c) (2) 518-88 112-89 Gentlemen : This refers to your letters dated February 1 and April 24, 1989 requesting in effect a ruling that no gain or loss shall be recognized in the merger of two of your affiliates, LMG Chemicals, Inc. (LMG) and Chemphil Manufacturing Corporation (CMC) under Section 34 (c)(2) of the Tax Code, as amended. cdtech It is represented that two of your affiliates, LMG and CMC, have merged and the same was approved by the Securities and Exchange Commission (SEC) on November 11, 1988 with LMG as the surviving company; that the combined corporate entity is now known as Chemphil-LMG, Inc. (CLI); that CMC is a domestic corporation established and organized on March 31, 1981 for the primary purpose of engaging in the manufacture, production, processing and preparation of all and every kind of industrial chemical products and in the processing or recycling of all refuse and raw materials into commercial commodities; that LMG is likewise a domestic corporation established and organized on August 21, 1979 for the primary purpose of engaging in the business of manufacture, import or export of any and all kinds of chemical products and goods, wares and merchandise of any and all kinds and nature whatsoever; the CMC has an authorized capital stock of P50,000,000.00 divided into 450,000 (sic) shares with a par value of P100.00 per share; that of the said stock, there have been duly subscribed and outstanding in the names of the following shareholders: Name No. of Shares Chemical Ind. of the Phils., 449,995 Incorporated Antonio M. Garcia 1 Eusebio M. Garcia 1 Ramon M. Garcia 1 Manuel M. Garcia 1 Ana Ma. G. Ordoveza 1 450,000 ======= that the present shareholders of CMC have fully paid their respective subscriptions; that LMG has an authorized capital stock of P45,000,000.00 divided into 95,000,000 (sic) shares with a par value of P1.00 per share; that of the said stock, there have been duly subscribed and outstanding in the names of the following shareholders as of November 11, 1988: Name No. of Shares Carlos N. de Castro 1 Robert V. Chandron 6,351 Chemical Ind. of the Phils. 61,766,242 Vicente Chuidan 127,021 Demetrio Copuyoc 8,793 Benjamin Fermin 12,702 Antonio M. Garcia 13 Eusebio M. Garcia 15 Manuel M. Garcia 15 Ramon M. Garcia 15 Ferro Chemicals, Inc. 8,793 Carlos Muoz 1 Ana Ma. G. Ordoveza 2 Jose Ma. L. Ordoveza 1 Felix C. Roces 12,702 Carmelita G. Salgado 1 Alfredo S. Roxas 1,587 Antonio R. Sandejos 4,763 Carlos C. Torres 12 Hiroshi Kawakubo 12 Masuo M. Ikegami 12 Kenzo Inove 12 R. Coyueto Securities, Inc. 1,705,268 Toyo Menka Kaisha, Ltd. 13,975,980 77,630,314 ========= that all the present shareholders of LMG have fully paid their respective subscriptions; that as a result of the said merger, CMC shall cease as a Corporation by operation of law and LMG shall remain as the surviving corporation and continue the activities and functions of CMC; that the holders of all issued and outstanding shares of stock of CMC shall surrender their certificates, and, in exchange, therefor, receive new certificate of stock of LMG; that pursuant to said merger, Chemical Industries of the Philippines, Inc. (CIP) which is the sole owner of all issued and outstanding shares of stock of CMC (the absorbed corporation) totalling 450,000 shares, exchanged with LMG the said shares of stock for LMG shares of stock based on their net book value as of August 31, 1988; that the 450,000 shares with a net book value of P77,152,401.00 or net book value per share of P171.4498 was exchanged with 25,630,324 LMG shares with a net book value of P77,152,401.00 or a net book value per share of P3.0102; that LMG and CMC own several parcels of land which pursuant to said merger should be transferred to CIT; and that the foregoing merger is being effected with the end in view of accomplishing greater efficiency and economy of management and primarily, to the advantage and welfare of both 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 a corporation, LMG Chemicals, Inc. (LMG) acquired all the assets and assumed all the liabilities of Chemphil-Manufacturing Corporation (CMC) solely for stocks, the transaction being undertaken for a bonafide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by CMC of all its assets and liabilities to LMG 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 CMC upon the distribution of LMG shares to CMC shareholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to CMC stockholders upon the exchange of their stocks solely for LMG stocks, which necessarily includes the transfer by Chemical Industries of the Philippines, Inc. (CIP) of its shares of stock to LMG in exchange for the latter's share of stock pursuant to said merger; under Section 34(c)(2) of the Tax Code. The basis of the assets received by LMG shall be the same as it would be in the hands of CMC. The basis of LMG stocks received by the stockholders of CMC shall be the same as the basis of the CMC stocks surrendered in exchange thereof. If the total liabilities to be assumed by LMG upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by CMC, the excess shall be recognized as gain to CMC [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 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 re-organization can be considered a 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 a 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 purpose 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 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 exchange; and 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, 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 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-B, 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. Very truly yours, (SGD.) JOSE U. ONG Commissioner