Tax Consequence of a Corporate Reorganization

November 7, 1989 BIR RULING NO. 225-89 34-c-2 121-89 225-89 Gentlemen : This refers to your letter dated September 29, 1989 requesting a ruling as to whether the contemplated merger of your clients, the University Physicians Services, Inc. (UPSI) and its wholly-owned subsidiary, the MCM Realty Corporation (MRC) with the UPSI as the surviving corporation qualifies as a tax-free merger under Section 34(c)(2) of the Tax Code, as amended. aisadc It is represented that UPSI, and MRC are both domestic corporations; that UPSI is engaged in operating and managing a hospital; that MRC is engaged in the real estate business specifically owning land and buildings for use as hospitals, clinics and similar edifices; that MRC's major real asset is a parcel of land with an area of 1,251.10 including the improvements thereon; that pursuant to the merger agreement, MRC hereby conveys, assigns and transfers all of its business, property, assets and goodwill which shall include but not limited to all of its real property, contractual rights, whether beneficial or onerous, licenses, privileges, property rights, claims, whether extrajudicial or judicial, leases, bank deposits, in short, the totality of all its assets as reflected in its Balance Sheet as of December 31, 1986; that UPSI hereby assumes all the liabilities of MRC as reflected in its Balance Sheet as of December 31, 1986; that in exchange for the assets and liabilities of MRC, UPSI shall issue its shares to all the stockholders of MRC whose names appear on record in its books; that after the merger, MRC shall be dissolved; and that the merger is in the best interest of both corporations in order to centralize the management of the hospital operations and for purposes of simplification in the business procedures, bookkeeping and administrative structure of both corporations as well as the elimination of duplicative functions. 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) and 5(b) of the Tax Code because a corporation (UPSI) will acquire all the assets and assume all the liabilities of MRC 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 MRC of all its assets and liabilities to UPSI 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 MRC upon the distribution of UPSI shares to MRC stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to MRC stockholders upon the exchange of their stocks solely for UPSI stocks under Section 34(c)(2) of the Tax Code. The basis of the assets received by UPSI shall be the same as it would be in the hands of MRC. The basis of UPSI stocks received by the stockholders of MRC shall be the same as the basis of the MRC stocks surrendered in exchange therefor. If the total liabilities to be assumed by UPSI upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by MRC, the excess shall be recognized as gain of MRC (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 stocks 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 re-organization 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 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 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. 9803-8, 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. 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. Very truly yours, (SGD.) JOSE U. ONG Commissioner