BIR Ruling No. 141-84

August 27, 1984 BIR RULING NO. 141-84 35-c-2-020-83-141-84 Gentlemen : This refers to your letter dated August 6, 1984 requesting confirmation of your opinion to the effect that the proposed merger of Family Bank & Trust Company (FBTC) and Filinvest Credit Corporation (FCC) qualifies as a tax-exempt reorganization under Section 35(c)(2) of the Tax Code, as amended. It is represented that FBTC is a universal bank while FCC is a financial intermediary with a quasi-banking license and a wholly-owned subsidiary of FBTC; that FBTC and FCC will be merged with FBTC as the surviving corporation for the following reasons, viz: "(a) To strengthen the capital base of FBTC to better position itself for any possible increase in the minimum paid-up capital requirement for universal banks and to give it greater flexibility in arranging financial packages, securities underwriting and equity investment in allied undertakings which are all indispensable in a developing economy. "(b) To eliminate conflicts of interest between the two companies since all functions will now directly be under one management and thus be guided by a unified corporate objective. "(c) To obtain operating economies and efficiencies since all departments with similar functions can now be combined and a decrease in staff can reasonably be expected due to economies of scale. However, FBTC will retain a separate division, FCC's Credit and Collection Department in view of its expertise in handling that particular function. "(d) To be able to offer a broader and more complete range of financial services to its client from retail to wholesale financing under the concept of "one-stop banking;" and "(e) To improve working skills arising from a complete exchange of expertise in the financing and banking fields." that to effect the proposed merger, all the assets and liabilities of FCC will be transferred to FBTC solely in exchange for the latter's shares of stock; that the stockholders of FCC will surrender their FCC shares, and in exchange therefor, will receive FBTC shares of stock in complete redemption of their FCC shares; that as a consequence of the exchange, FBTC will receive its own shares for the FCC shares held by it; that FBTC will therefore waive its right to receive these new shares as these will be deemed held in treasury or retired; that the corporate life of FCC will be shortened to complete the process of merger; and that thereafter, the business of FCC will be continued and pursued by FBTC. 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 acquires all of the properties of another corporation solely for stocks, the transaction to be undertaken being for a bona-fide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by FCC of all its assets and liabilities to FBTC 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 FCC upon the distribution of FBTC shares to FCC stockholders in complete redemption of their stocks under Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to FCC stockholders upon the exchange of their stocks solely for FBTC stocks under Section 35(c)(2) of the Tax Code. The basis of the assets received by FBTC shall be the same as it would be in the hands of FCC. The basis of FBTC stocks received by the stockholders of FCC shall be the same as the basis of the FCC stocks surrendered in exchange therefor. If the total liabilities to be assumed by FBTC upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by FCC, the excess shall be recognized as gain of FCC. (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 transaction 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 transactions incident to, or pursuant to the plan. (2) A complete statement of the cost or other basis of all properties, 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 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 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. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner