Whether the Merger of La Perla Industries and Pioneer Realty and Devt. Corp. is as a Tax-exempt Reorganization

August 1, 1986 BIR RULING NO. 138-86 35-c-2 222-85 138-86 Gentlemen : This refers to your letter dated April 2, 1986 requesting a ruling as to whether the merger of La Perla Industries, Inc. (La Perla) and Pioneer Realty and Development Corporation (Pioneer) qualifies as a tax-exempt reorganization under Section 35(c)(2) of the Tax Code as amended. It is represented that La Perla is a domestic corporation duly organized and existing under the laws of the Philippines; that its primary purpose is to purchase or otherwise acquire, and to own, hold, sell, exchange, mortgage, lease, develop and otherwise deal in and dispose of real properties and any interest or right thereon; to manage, administer and improve the real and personal properties owned or controlled by the corporation; and to carry on a general real estate and construction business is connection therewith; that the authorized capital stock of La Perla is P65,000,000 divided into 650,000 shares with a par value of P100.00 per share; that the amount of capital stock of La Perla which had been subscribed is P400,000; that the total capital stock issued and outstanding (exclusive of treasury shares) amount to P37,945,600.00, the full amount of which has been received in payment thereof; that it holds treasury stocks amounting to P3,084,500.00; that Pioneer is a domestic corporation duly organized and existing under the Law of the Philippines; that the primary purpose of Pioneer is to buy, sell, deal in, lease, hold, improve, subdivide, and otherwise dispose of lands, houses and buildings or any interest therein, and to construct on land owned by the corporation, houses, buildings, roads, bridges, alleys, artesian wells, reservoirs, irrigation ditches, sewers, and all kinds of improvements; that the authorized capital stock of Pioneer is P30,000,000 divided into 300,000 shares with a par value of P100.00 per share; that the amount of capital stock of Pioneer which had been subscribed is P1,000,000; that the total subscriptions to capital stock amount to P19,164,400.00, the full amount of which has been received in payment thereof; that the merger is desirable and advantageous to La Perla and Pioneer for the following reasons: (a) the merger will make possible a more productive use of the properties of the constituent corporations; (b) the consolidation of the assets of the two (2) corporations will allow the procurement of financing and credit facilities under more favorable terms; and (c) the integration of the administrative facilities of the two (2) companies will result in economy of scale and efficiency of operations; that Pioneer shall be the absorbed corporation and La Perla will be the surviving corporation that all the rights, business, assets and other properties of Pioneer, including but not limited to, all of its real and personal property, contractual rights, licenses, privileges, property rights, claims, bank deposits, stocks, accounts receivables, credit lines, supplies, equipment, inventory and such other assets as shown in the audited balance sheet of Pioneer as of June 30, 1983 shall be conveyed, assigned and transferred to La Perla in consideration for shares of stock of La Perla; that it is understood that whatever assets may not have been reflected in the said balance sheet of Pioneer as of June 30, 1983 or may have been omitted therefrom for any reason whatsoever as well as all other assets which may come into its possession or to which it may be entitled after the aforesaid date and until the approval of the merger by the Securities and Exchange Commission shall be deemed included in the conveyance, assignment and transfer and all transaction entered into by Pioneer during the said period shall be for the account of La Perla; that La Perla shall become the owner of all the rights, assets, privileges and other properties of the constituent corporations and shall assume all the debts and liabilities of the constituent corporations in the same manner as if La Perla had itself incurred such liabilities and obligations and any such claim or action or proceeding against Pioneer shall be prosecuted by or against La Perla; that the shares of Pioneer then outstanding in the hands of its stock-holders shall be exchanged for shares of the capital stock of La Perla on the basis of the net transfer value of the assets transferred to La Perla; and that the assets will be transferred at book value as determined on the basis of the audited financial statements as of June 30, 1983. 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 (La Perla) acquired all of the properties of another corporation (Pioneer) solely for stocks, the transaction undertaken being for a bonafide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by Pioneer of all its assets and liabilities to La Perla 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 Pioneer upon the distribution of La Perla shares to Pioneer stockholders in complete redemption of their stocks under Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to Pioneer stockholders upon the exchange of their stock solely for La Perla stocks under Sections 35(c)(2) of the Tax Code. The basis of the assets received by La Perla shall be the same as it would be in the hands of Pioneer. The basis of La Perla stocks received by the stockholders of Pioneer shall be the same as the basis of the Pioneer stocks surrendered in exchange therefor. If the total liabilities to be assumed by La Perla upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by Pioneer, the excess shall be recognized as gain of Pioneer. (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 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 re-organization, including: (1) A copy of the plan of reorganization, together with a statement executed under the penalties of perjury, showing in full the purchases 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 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: cdtech (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-B, P-B 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. cd Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner