Tax Consequence of the Contemplated Merger of a Company

June 8, 1989 BIR RULING NO. 121-89 34-c-2 14-85 121-89 Gentlemen : This refers to your letter dated March 8, 1989 requesting a ruling as to whether the contemplated merger of your company, FMF Development Corporation (FMF) and its wholly-owned subsidiary, the Mutual Realty Corporation (MRC) with FMF as the surviving corporation qualifies as a tax-exempt reorganization under Section 34(c)(2) of the Tax Code, as amended. It is represented that FMF and MRC are both domestic corporations engaged in the real estate business; that FMF is engaged in the renting out of office spaces while MRC is engaged in the renting out of parking spaces; that MRC's major real asset is a 4,005 sq.m. parking lot; that FMF owns all of the outstanding capital stock of MRC; that pursuant to the merger agreement MRC shall convey, transfer and assign the totality of all its assets as reflected in its Balance Sheet as of June 30, 1989; that FMF assumes all of the liabilities of MRC as likewise reflected in its Balance Sheet as of June 30, 1989; that in consideration of the conveyance and assignment of the assets of MRC and the assumption of its liabilities by FMF, FMF agrees to issue its shares to the stockholders of MRC; that MRC shall amend its Articles of Incorporation for the purpose of shortening its corporate life so that its term of existence may expire on midnight of June 30, 1989; and that the merger is for the best interest of both corporations since the business procedures, bookkeeping and administrative structure of both corporations will be simplified as well as eliminate duplicative functions and achieve a wider capital base. 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 (FMF) will acquire all the assets and assume all the liabilities of MRC 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. cdtech Accordingly, the transfer by MRC of all its assets and liabilities to FMF 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 MRC upon the distribution of FMF shares to MRC stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to MRC stockholders upon the exchange of their stocks solely for FMF stocks under Section 34(c)(2) of the Tax Code. The basis of the assets received by FMF shall be the same as it would be in the hands of MRC. The basis of FMF stocks received by the stockholders of MRC shall be the same as the basis of the MRC stocks surrendered in exchange therefor. If the total liabilities to be assumed by FMF upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by MRC, the excess shall be recognized as gain of MRC (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 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: (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 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 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 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