Tax Consequence of the Merger

November 5, 1990 BIR RULING NO. 208-90 34 (c) (2) 112-89 208-90 Gentlemen : This refers to your letter dated September 14, 1990 stating that Precision Electronics Corporation (PEC) and National Panasonic (Phils.), Inc. (NPPI) are both domestic corporations; that PEC is a corporation duly organized to manufacture, sell at wholesale; lease and use appliances and machinery generators, motors, lamps, apparatus devices, supplies and articles of every kind; that NPPI is the exclusive distributor in the Philippines of National brand electronic products manufactured by PEC; that PEC and NPPI will effect a statutory merger in accordance with the provisions of Sections 76 to 80 of the Corporation Code with PEC at the surviving corporation; that for this purpose, the constituent corporations have adopted a Plan of Merger; that pursuant to the Plan of Merger, NPPI will transfer all its assets and liabilities to PEC in exchange for new shares of the capital stock of PEC; that the exchange ratio to be used is 1.29 shares of PEC per one (1) share of NPPI; that this exchange ratio takes into account the audited financial statements of PEC and NPPI as of June 30, 1990; that it is represented that the liabilities of NPPI to be assumed by PEC do not exceed the cost basis of the assets of NPPI to be transferred to PEC; that fractional shares shall not be issued; that PEC and NPPI are both operating at a net income position; that the business activities of the companies are parallel and complementary; and that the merger is desirable and advantageous to PEC and NPPI and their respective stockholders. aisadc In connection therewith, you now request confirmation of your opinion that "1. The merger of PEC and NPPI in which all the assets and liabilities of NPPI will be transferred to PEC which will survive the merger qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 34 (c)(2). Thus, no gain or loss shall be recognized to PEC and NPPI upon the transfer of the assets and liabilities of NPPI to PEC pursuant to the merger. "2. No gain or loss shall be recognized to NPPI and its shareholders upon the issuance and distribution of PEC's shares to them in complete redemption of their NPPI shares pursuant to the plan of merger; "3. The basis of the PEC shares of stock received by the stockholders of NPPI shall be the same as their basis in NPPI shares of stock surrendered and exchanged pursuant to the plan of merger; "4. The basis of the properties of NPPI in the hands of PEC shall be the same as it would be in the hands of NPPI; "5. The transfer of assets of NPPI to PEC will not be considered as a transfer of property for an insufficient consideration subject to gift tax since there is no intention to donate on the part of any of the parties and the transaction is effected purely for business reasons." In reply thereto, I have the honor to inform you that the above reorganization is a merger, within the contemplation of Section 34 (c)(2) of the Tax Code, because a corporation PEC acquired all the assets and assumed all the liabilities of NPPI solely for stocks, the transaction being undertaken for a bonafide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by NPPI of all its assets and liabilities to PEC 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. No gain or loss shall be recognized to NPPI upon the distribution of PEC shares to NPPI shareholders in complete redemption of their stocks under Section 34 (c)(2) of the Tax Code. No gain or loss shall be recognized to NPPI stockholders upon the exchange of their stocks solely for PEC stocks. The basis of the assets received by PEC shall be the same as it would be in the hands of NPPI. The basis of PEC stocks received by the stockholders of NPPI shall be the same as the basis of the NPPI stocks, surrendered in exchange therefor. 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 the 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 re-organization can be considered a 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 thereof, 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 purpose 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 distribution or other property or money received from the exchange including a statement of all distribution 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 exchange; and 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 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-H 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. Very truly yours, (SGD.) JOSE U. ONG Commissioner