Transfer of All Assets and Liabilities in Exchange for Shares of Stock Do Not Give Rise to Recognition of Gain or Loss

December 26, 1985 BIR RULING NO. 221-85 35-c-2 138-85 221-85 Gentlemen : This refers to your letter dated December 10, 1985 requesting a ruling as to whether the proposed merger of the Philippine Commercial International Bank, Inc. (PCIB) and Insular Bank of Asia and America (IBAA) qualifies as a tax-exempt reorganization under Section 35(c)(2) of the Tax Code, as amended. It is represented that PCIB is a commercial banking corporation organized and existing under and in accordance with the laws of the Philippines, with principal place of business at No. 1 PCIBank Tower, Makati Avenue, Makati, Metro Manila; that IBAA is likewise a commercial banking corporation organized and existing under and in accordance with the laws of the Philippines, with principal office at IBAA Bldg., Paseo de Roxas corner de la Rosa St., Makati, Metro Manila; that PCIB has an authorized capital stock of P1,165,000,000.00 divided into 70,000,000 common shares with a par value of P10.00 per share and 46,500,000 preferred shares with a par value of P10.00 per share; that IBAA has an authorized capital stock of P570,000,000 divided into 5,150,000 Class A common shares and 550,000 Class B common shares with a par value of P100.00 per share; that pursuant to a Stock Purchase Agreement between PCIB and certain stockholders of IBAA, PCIB has become, as of December 4, 1985, the owner of a majority of the stock of IBAA, to the extent of 98.62%, representing 2,011,798 Class A common stock; that pursuant to the Plan of Merger, IBAA shall convey, assign and transfer to PCIB all of IBAA's properties, real and personal, including all rights, privileges, immunities and franchises as are presently being enjoyed or held by IBAA, and all receivables due on whatever account, including subscriptions to shares and other choses in action, as of effective merger date which is December 27, 1985; that as of September 30, 1985, IBAA's assets (resources) have been valued at P4,895,484,932.00; that PCIB shall assume all existing and actual liabilities and obligations of IBAA as of effective merger date, in the same manner as if PCIB had itself incurred such liabilities or obligations; that as of September 30, 1985 IBAA's total liabilities have been valued P4,338,825,118.00 that in consideration of the aforementioned conveyance, assignments, transfers and assumption of liabilities, PCIB (i) shall cancel whatever shares of stock in IBAA that it has purchased or acquired prior to effective merger date, the equity in the corporation surviving the merger (PCIB) being thenceforth represented only by shares of stock in PCIB as surviving bank, and (ii) shall in respect of stockholders of IBAA who may not choose to take PCIB's tender offer of their shares, exchange said shares with PCIB shares of stock, after merger date and subject to the surrender of such IBAA shares on the basis of ten (10) shares of PCIB for one (1) share of IBAA; that on the effective date of the merger, the separate corporate existence of IBAA shall cease and expire, that the proposed merger will improve the competitive position of the surviving corporation, PCIB in the commercial banking field and increase its financial strength through pooling of resources and reducing over-all business expenses, particularly administrative expenses; that with the addition of the IBAA branches to the present PCIB branch network, PCIB will have a very extensive branch network in the country; and that armed with a larger capital base and extensive branch network, PCIB will be in a better position to service the increasing financial needs of the growing Philippine economy. 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 (PCIB) acquired all of the properties of another corporation (IBAA) 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 IBAA of all its assets and liabilities to PCIB 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 IBAA upon the distribution of PCIB shares to IBAA stockholders in complete redemption of their stocks under Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to IBAA stockholders upon the exchange of their stock solely for PCIB stocks under Section 35(c)(2) of the Tax Code. The basis of the assets received by PCIB shall be the same as it would be in the hands of IBAA. The basis of the PCIB stocks received by the stockholders of IBAA shall be the same as the basis of the IBAA stocks surrendered in exchange therefor. If the total liabilities to be assumed by PCIB upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by IBAA, the excess shall be recognized as gain of IBAA. (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: cd (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 participate 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. cdta Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner