Tax Consequence of the Proposed Merger of BPI Investment Corp. and Bank of the Philippine Islands

August 26, 1985 BIR RULING NO. 138-85 35-c-2 141-84 138-85 Gentlemen : This refers to your letter dated July 5, 1985 requesting confirmation of your opinion to the effect that the proposed merger of BPI Investment Corporation (BPIIC) and Bank of the Philippine Islands (BPI) qualifies as a tax-exempt reorganization under Section 35(c)(2) of the Tax Code, as amended. It is represented that BPI is a commercial banking and trust corporation duly organized and existing under the laws of the Philippines and duly licensed by the Central Bank of the Philippines as a universal bank; that BPIIC is a corporation duly organized and existing under the laws of the Philippines and duly licensed by the Central Bank of the Philippines to perform quasi-banking functions, that in line with the government's policy to strengthen the banking system through the merger or consolidation of banks and financial institutions, the Central Bank of the Philippines has approved in principle the proposed merger of BPIIC into BPI, that the plan call for the merger of BPIIC into BPI, which owns approximately 88% of the issued and outstanding common stock of BPIIC consisting of 10 million shares with a par value of P10.00 per share (BPIIC has no preferred stock issue); that BPI as the surviving entity in the merger will carry on the activities and functions of BPIIC; that BPI will acquire all assets of BPIIC and in exchange therefore, BPI will (a) assume all the existing debts, liabilities and obligations of BPIIC, contingent or otherwise, (b) surrender to BPIIC all its shares of stock in BPIIC, and (c) issue to BPIIC such number of preferred shares of BPI as shall equal the number of BPIIC shares held by stockholders other than BPI, for distribution to these stockholders; that BPI will increase its present authorized capital stock of P1.4 Billion, divided into fourteen Million common shares with a par value of P100.00 each P1.412 billion, the increase of P12 million to consist of one million two hundred thousand preferred shares with a par value of P10.00 each; that the preferred shares shall be non-voting, non-convertible, non-participating, with an annual dividend rate of 8% of par value, and redeemable at par value seven (7) years from date of issue. cdta In reply thereto, I have the honor to inform you that the above reorganization is a merger within the contemplation of Section 35(c)(2) and 5(b) of the Tax Code because a corporation (BPI) acquires all of the properties of another corporations (BPIIC) 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. Accordingly, the transfer by BPIIC of all its assets and liabilities to BPI solely, in exchange for the latter's shares of stock 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 BPIIC upon the distribution of BPI shares to BPIIC stockholders in complete redemption of their stocks under Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to BPIIC stockholders upon the exchange of their stocks solely for BPI stocks under Section 35(c)(2) of the Tax Code. The basis of the assets received by BPI shall be the same as it would be in the hands of BPIIC. The basis of BPI stocks received by the stockholders of BPIIC shall be the same as the basis of BPIIC stocks surrendered in exchange therefor. If the total liabilities to be assumed by BPI upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by BPIIC, the excess shall be recognized as gain of BPIIC. (Sec. 35(c)(4)(b), Tax Code as amended by P.D. 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 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, 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 transaction 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 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 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. cdti 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 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. cd Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner