Tax Consequence of the Proposed Reorganization

July 24, 1981 BIR RULING NO. 127-81 35-c-2 000-00 127-81 Philippine-Singapore Hotel Corporation South Superhighway Makati, Metro Manila Attention: Mr . Jose F . S . Bengzon, Jr . President Gentlemen : This refers to your letter dated February 9, 1981 requesting a ruling on the tax consequence of the proposed reorganization involving Philippine-Singapore Hotel Corporation (PSHC), Merchants Development Corporation (MERCHANTS), and Monarch Estates Development Corporation (MONARCH). It is represented that PSHC, a Philippine corporation, in a registered tourism enterprise under P.D. No. 535; that it is owned 60% by Filipinos and 40% by Singapore Airlines; that it operates a hotel known as "The Tradewinds Hotel Manila"; that MERCHANTS is also a Philippine corporation wholly-owned by Filipinos and owns 40% of PSHC; that MONARCH, another Philippine corporation, owns the land and the building which houses the said hotel being operated by PSHC. It appears also that MERCHANTS was the sole owner of the 500,000 stocks at par value of P10.00 each in MONARCH representing 100% of the entire subscribed capital stock of said corporation; that on March 30, 1979, in an agreement entered into by the abovenamed corporations, PSHC bought all of the said 500,000 stocks for a total purchase price of P5,000,000, subject to the conditions: (1) that all collectible and/or receivables of MONARCH from third parties and other assets except the land and building known as "Tradewinds Hotel Manila" shall belong to MERCHANTS; and (2) that all payables and/or liabilities of MONARCH except its liability to the DBP , shall pertain to and shall be assumed and paid for by MERCHANTS. In other words, while PSHC has become the sole owner of all the stocks of MONARCH, the latter remains the owner of the land and the building which houses the Tradewinds Hotel as well as the debtor of DBP. In a reformatory contract executed by the parties on December 9, 1980, it is stated that the purchase price of P5,000,000 is based on the assets of MONARCH consisting of the land and building known as Tradewinds Hotel Manila and on its liability to the DBP incurred in the construction of said hotel and acquisition of its furniture, fixture and equipment to the exclusion of MONARCH's accounts receivable from MERCHANTS in the amount of P11,701,696.00 and other liabilities. In the said reformatory agreement, it is also stipulated that the purchase price of the said MONARCH stocks was increased from P5,000,000 to P16,701,696.00 of which the increase of P11,701,696.00 shall be charged against and, therefore, settled and paid by means of the receivables of MONARCH from MERCHANTS, and that said P11,701,696.00 shall be assumed by PSHC. DBP has informed MONARCH that the debt restructuring program or PSHC could not be implemented unless the operation of the hotel and the ownership of all hotel assets including the land and the building are consolidated in one corporation. In compliance, therefore, with this requirement of DBP, PSHC shall be merged with MONARCH by transferring all its assets at book value (including MONARCH shares) and liabilities (which consist among others of accounts payable to MONARCH). The shareholders of PSHC will, therefore, surrender their stocks in PSHC and receive in exchange stocks of MONARCH. PSHC will dissolve and MONARCH will be continued. In reply, I have the honor to inform you that the above reorganization is a merger within the contemplation of Sections 35(c)(2) and 5(b) of the Tax Code because a corporation acquires all of the properties of another corporation solely for stocks, the transaction to be undertaken being for the bonafide business purpose and not solely for the purpose of escaping the burden of taxation. It has been ruled that the transfer of assets of a parent to its subsidiary constitutes a tax-free merger. [Helvering vs. Leary, Sr. 93 F 2d 826, 20 AFTR 599]. In this case, a Maryland Corporation owning practically all of the common stocks of a New York corporation transferred its assets including such stocks to the New York corporation, which issued its own stocks to the Maryland Corporation's stockholders in exchange for their stocks in such corporation. Accordingly, the transfer by PSHC of all its assets and liabilities to MONARCH (including the accounts payable to MONARCH) solely, in exchange for the latter's shares of stocks shall not give rise to the recognition of gain or loss pursuant to Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to PSHC upon the distribution of MONARCH shares to PSHC stockholders in complete redemption of their stocks under Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to PSHC stockholders upon the exchange of their stocks solely for MONARCH stocks under Section 35(c)(2) of the Tax Code. The basis of the assets received by MONARCH shall be the same as it would be in the hands of PSHC. The basis of MONARCH stocks received by the stockholders of PSHC shall be the same as the basis of the PSHC stocks surrendered in exchange therefor. If the total liabilities to be assumed by MONARCH upon effective merger date exceed the original or acquisition cost (cost basis) of the assets transferred by PSHC, the excess shall be recognized as gain of PSHC. (Sec. 35(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 stocks acquired by the parties, the gain derived from such sale or exchange shall be subject to income tax. The sale by MERCHANTS of 500,000 MONARCH shares to PSHC for P16,701,696.00 shall be subject to the 1/4 of 1% stock transaction tax. In this connection, it appears that MERCHANTS as seller has paid the total amount of P41,754.24 as stock transaction tax under Confirmation Receipt Nos. A078471 and A5791174 dated April 2, 1979 and December 9, 1980, respectively. 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 describe reorganization can be considered a merger under Section 35(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, a party to a 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 transaction incident to, or pursuant to the plan. (2) A complete statement of the cost or other basis of all property, including all stock 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 distributions 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 of 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 participate 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., 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. cdt Very truly yours, RUBEN B. ANCHETA Acting Commissioner