Merger Gives Rise to Neither Gain Nor Loss

May 3, 1993 BIR RULING NO. 174-93 MERGER GIVES RISE TO NEITHER GAIN NOR LOSS 34 (c) (2) (C) 377-92 174-93 Lucky Tableware Factory, Inc. Canduman, Mandaue Cebu Attention: Mr . Vicente B . Sabarre VP-Comptroller This refers to your letter dated February 11, 1993, requesting for a ruling on the tax consequence of the merger of your company, Lucky Tableware Factory, Inc., with Visayan Glass Factory, Inc. and Visayan Enamelware Factory, Inc., whereby your company is the surviving corporation. It appears that Lucky Tableware Factory, Inc., Visayan Glass Factory, Inc. and Visayan Enamelware Factory, Inc. are all domestic corporations duly registered with the Securities and Exchange Commission (SEC); that the corporations desire and have agreed to offer a broader and more complete range of products to customers, improve working skills through exchange of expertise, obtain operating economies and efficiencies through coordinated functions, and eliminate conflicts among them and pursue a unified corporate objective directly under one management; that to realize and implement their objective and agreement, the three (3) corporations decided and agreed to merge with Lucky Tableware Factory, Inc. as the surviving corporation; that the surviving corporation shall thereafter amend its Articles of Incorporation to have as its primary purpose to engage in the business of manufacturing, processing, marketing, trading, buying and selling, importing and exporting, and otherwise dealing in porcelain, enamelware and glassware products including but not limited to tumblers, drinking glasses, glass bowls, glass containers, sugar jars, and glass bottles, chinawares, ceramics, tablewares, aluminum wares, opal glass, hurricane lamps, thermos bottles, and tubes, household utensils and other similar or allied products of every nature, kind and description; that pursuant to the plan of merger and articles of merger, the separate existence of Visayan Glass Factory, Inc. and Visayan Enamelware Factory, Inc., shall cease, and will transfer all their assets and liabilities to the surviving corporation, Lucky Tableware Factory, Inc., in exchange for new shares of the capital stock of Lucky Tableware Factory, Inc., based on the audited financial statements of the absorbed corporations as of September 30, 1991; and that the said merger has been already approved by the SEC on January 14, 1993. In reply, 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, as amended, because a corporation (Lucky Tableware Factory, Inc.) will acquire all the assets and assume all the liabilities of the absorbed corporations (Visayan Glass Factory, Inc. and Visayan Enamelware Factory, Inc.) 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. Accordingly, the transfer by Visayan Glass Factory, Inc. and Visayan Enamelware Factory, Inc. of all their assets and liabilities to Lucky Tableware Factory, Inc., 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, as amended. No gain or loss shall be recognized to Visayan Glass Factory, Inc. and Visayan Enamelware Factory, Inc. upon the distribution of Lucky Tableware Factory, Inc. shares to the stockholders of the two (2) absorbed corporations in complete redemption of their stocks under Section 34(c) (2) of the Tax Code. The basis of the assets received by the Lucky Tableware Factory, Inc. stocks received by the stockholders of the absorbed corporations shall be the same as the basis of the latter's stock surrendered in exchange therefor. If the total liabilities to be assumed by Lucky Tableware Factory, Inc., upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by Visayan Glass Factory, Inc. and Visayan Enamelware Factory, Inc., the excess shall be recognized as gain of the absorbed corporations (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. cd 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 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 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 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 the 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, PH 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. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. cdta VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue