Tax Consequence of the Proposed Merger of Ayala Int'l. Phil., Inc., E. Zobel Holdings, Inc. and Enzo Phil. Mgt., Inc.

December 27, 1985 BIR RULING NO. 222-85 35-c-2 138-85 222-85 Gentlemen : This refers to your letter dated December 6, 1985 requesting a ruling as to the tax consequence of the proposed merger of Ayala International Phils., Inc. (AIP), E. Zobel Holdings, Inc. (EZHI) and Enzo Phils. Management, Inc. (EPMI). It appears that AIP is a domestic corporation duly organized and existing under the laws of the Philippines; that its primary purpose is to require (by purchase, exchange or otherwise), sell, market, distribute, at wholesale or retail, as well as to import and export for its own account or for the account of others, goods, merchandise and chattels of every kind and description; that the capital stock of AIP is P20,000,000 divided into 2,000,000 shares with a par value of P10.00 per share; that the amount of the capital stock of AIP which had been subscribed is P5,000,000; that EZHI is a domestic corporation duly organized and existing under the laws of the Philippines; that the primary purpose of EZHI is to purchase or otherwise acquire and own, hold, use, sell, assign, transfer, mortgage, pledge, exchange, or otherwise dispose of real and personal property of every kind and description (without engaging in business as a financial intermediary) and while the owner or holder of any such real or personal property, to receive, collect and dispose of the rent or other income arising from such property; that the authorized capital stock of EZHI is P20,000,000 divided into 2,000,000 shares with a par value of P10.00 per share; that at least 25% of the authorized capital stock has been subscribed and at least 25% thereof have been paid; that EPMI is a domestic corporation duly organized and existing under the laws of the Philippines; that the primary purpose of EPMI is to market, offer, sell, provide and render to domestic and foreign clients, whether private or public corporation, partnerships, organizations, institutions, associations and individuals, technical consultation and/or management, and advisory services; to enter into contracts, for profit, of undertaking, to manage or operate all or substantially all of the business of a corporation, partnership, organization, institution, association or an individual, such as but not limited to management contracts, service contracts and operating agreement; that the capital stock of EPMI is P50,000,000 divided into 5,000,000 shares with a par value of P10.00 per share; that AIP and EZHI shall be the absorbed corporation and EPMI will be the surviving corporation; and whose corporate name will be changed to E. Zobel, Inc. (EZI); that in accordance with the merger agreement AIP and EZHI assigned, transferred and conveyed to EPMI/EZI all the rights, interests, titles, equities, privileges, immunities, patents, copyrights, goodwill, tradenames, trademarks, grants, licenses, permits, franchises and other interests, whether real, existing, inchoate or otherwise with or belonging to AIP and EZHI and all the properties of AIP and EZHI whether real, personal, mixed or otherwise, as well as all receivables in favor of AIP and EZHI on whatever accounts, including subscriptions to shares and other choses in action, and each and every other interest of or belonging, pertaining or due to AIP and EZHI, as reflected in the Audited Financial Statements of AIP and EZHI dated September 30, 1985; that AIP and EZHI likewise assigned, transferred and conveyed to EPMI/EZI and EPMI/EZI shall assume and be responsible and liable for all the liabilities, indebtedness and obligations of AIP and EZHI in the same manner as if EPMI/EZI itself had incurred such liabilities, indebtedness and obligations as reflected in the Audited Financial Statements of AIP and EZHI dated September 30, 1985; that EPMI/EZI as the surviving corporation shall acquire, possess, and succeed to all rights, interests, titles, equities, privileges, immunities, patents, copyrights, goodwill, tradenames, trademarks, grants, licenses, permits, franchises and other interests, whether real, existing, inchoate or otherwise of or belonging to AIP and EZHI, the absorbed corporations in addition to those already acquired, granted, conferred, pertaining or belonging to and enjoyed or possessed by EPMI/EZI and all the properties of AIP and EZHI, whether real, personal, mixed or otherwise, as well as all receivables in favor of AIP and EZHI on whatever account including subscriptions to shares and other choses in action, and each and every other interest of or belonging, pertaining or due to AIP and EZHI, shall all be acquired by, transferred and conveyed to and vested in EPMI/EZI without need of any other or further act and deed; that EPMI/EZI shall assume and be responsible and liable for all the liabilities (including all taxes, duties, fees, imposts and other tariffs due to the Government of the Philippines and all its agencies, subdivisions and instrumentalities), indebtedness and obligations of AIP and EZHI in the same manner as if EPMI/EZI itself had incurred such liabilities, indebtedness and obligations; that since EPMI/EZI is the sole stockholder of the absorbed corporation AIP, EPMI/EZI shall not cause to be issued nor shall EPMI/EZI actually issue its own shares of stock to itself on account of the merger provided herein; that EPMI/EZI shall issue its own shares of stock in exchange for the shares of stock of EZHI now held by EZHI's stockholders; that EPMI/EZI and EZHI have agreed that the networth valuations in accordance with the audited financial statements of EPMI/EZI and EZHI as of September 30, 1985 shall be the basis of determining, the exchange of their respective shares; and that AIP, EZHI and EPMI/EZI have decided to merge into a single corporation in order to realize economies in operations and greater volume of sales. cdti 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 EPMI/EZI acquires all of the properties of two corporations EZHI and AIP 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 AIP and EZHI of all their assets and liabilities to EPMI/EZI 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 EZHI upon the distribution of EPMI/EZI shares to EZHI stockholders in complete redemption of their stocks under Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to EZHI stockholders upon the exchange of their stocks solely for EPMI/EZI stocks under Section 35(c)(2) of the Tax Code. The basis of the assets received by EPMI/EZI shall be the same as it would be in the hands of EZHI. The basis of the EPMI/EZI stocks received by the stockholders of EZHI shall be the same as the basis of the EZHI stocks surrendered in exchange therefor. If the total liabilities to be assumed by EPMI/EZI upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by EZHI, the excess shall be recognized as gain of EZHI. (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: cd 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 dispositions 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 as 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-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 consequence of the merger. cdta Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner