Income and Transfer Tax Aspects of a Merger

November 21, 1989 BIR RULING NO. 237-89 34 (c) (2) 121-89 237-89 Gentlemen : This refers to your letter dated October 23, 1989 requesting in behalf of your client, Abcar-Paragon Mining Corporation ("APMC"), a ruling on the following relative to the income and transfer tax aspects of its merger with United Asia Resources and Geothermal Corporation ("UAR"): (A) The transactions described hereunder, including the transfer and conveyance of all the assets and liabilities of APMC to United Paragon in exchange for shares of stock of United Paragon, constitute a "merger" within the meaning of Section 34(c)(2) and (c)(6)(b) of the National Internal Revenue Code, and both APMC and United Paragon will be parties to the merger. (B) No gain or loss will be recognized to APMC upon the transfer and conveyance of its assets to United Paragon, and upon the assumption by United Paragon of APMC's liabilities, obligations and undertakings, in exchange solely for the issuance of United Paragon stock directly to APMC shareholders pursuant to the Plan of Merger. (C) No gain or loss will be recognized to APMC shareholders upon their receipt of United Paragon stock in exchange for APMC shares. (D) No gain or loss will be recognized to United Paragon upon its receipt of the assets transferred by APMC and its assumption of the liabilities, undertakings and obligations of APMC, as well as upon the issuance by United Paragon of its shares of stock to APMC shareholders who surrender their APMC stock to United Paragon, pursuant to the Plan of Merger. (E) No capital gains tax on stock transaction under the provisions of Section 33 of the National Internal Revenue Code is payable either by United Paragon or APMC shareholders upon the issuance by United Paragon of its shares to the APMC shareholders who surrender their APMC stock to United Paragon. (F) No gift tax is payable by APMC or United Paragon or the APMC shareholders upon the transactions and exchanges made pursuant to the Plan of Merger. It is represented that APMC is a mining corporation organized and existing under and in accordance with the laws of the Philippines; that UAR is likewise a mining corporation organized and existing under and in accordance with the laws of the Philippines; that APMC has an authorized capital stock of four hundred fifty-three million pesos divided into 3,300,000,000 shares of common stock of the par value of P0.01 per share, 2,000,000,000 shares of Class A preferred stock of the par value of P0.01 per share and 4,000,000 shares of Class B preferred stock of the par value of P100 per share; that UAR has an authorized capital stock of P5,000,000.00 divided into 500,000,000 shares of common stock of the par value of P0.01 per share; that pursuant to the Plan of Merger approved by the Board of Directors and stockholders of each of APMC and UAR on meetings held respectively on September 15, 1989 and September 29, 1989 (APMC) and September 26, 1989 and October 12, 1989 (UAR); (a) APMC shall transfer to UAR all its properties, real and personal, including all rights, privileges, immunities and franchises as are presently being enjoyed or held by APMC, to the extent permitted or required by law, and all receivables due on whatever account, including subscriptions to APMC shares and other choses in action as of effective merger date, which is expected on November 25, 1989. As of July 31, 1989, APMC's assets were valued at P554,088,157.00. In addition, APMC also has exclusive operating agreements in connection with certain mining leases which have been appraised at a net project value of not less than P1,476 million within a period of ten years; (b) APMC shall also transfer all its existing and actual liabilities and obligations as of effective merger date to UAR which will assume them in the same manner as if UAR had itself incurred such liabilities or obligations. As of July 31, 1989, APMC's total liabilities were valued at P418,873,777; (c) In return, UAR shall amend its Articles of Incorporation to (i) change its corporate name to United Paragon Mining Corporation ("United Paragon") and (ii) increase its authorized capital stock from P5,000,000.00 to P1,027,000,000.00; (d) As a consequence of United Paragon's acquisition of the assets, and its assumption of the obligations and liabilities of APMC, and the merging of the corporate personalities of the two mining companies into one, United Paragon shall, out of the increased authorized capital stock of United Paragon, issue to APMC, which in return, will issue to its stockholders, United Paragon shares amounting to P727,000,000.00; and (e) On effective date of merger, the separate corporate existence of APMC shall cease and expire; and that the proposed merger between APMC and UAR is expected to achieve for the parties, mutually advantageous and beneficial business purposes, such as but not limited to (1) increased financial strength through pooling of their resources; (2) a more diversified and stable capital base; (3) increased operating economies and efficiencies; and (4) reduction of overall business expenses, particularly administrative expenses. 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 (UAR, which will eventually be changed into United Paragon Mining Corporation) will acquire all the assets and assume all the liabilities of APMC solely for stocks, the proposed 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 APMC of all its assets and liabilities to UAR (United Paragon) 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 APMC upon the distribution of UAR (United Paragon) shares to APMC stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to APMC stockholders upon the exchange of their stocks solely for UAR (United Paragon) stocks under Section 34(c) of the Tax Code. The basis of the assets received by UAR (United Paragon) shall be the same as it would be in the hands of APMC. The basis of UAR (United Paragon) stocks received by the stockholders of APMC shall be the same as the basis of the APMC stocks surrendered in exchange therefor. If the total liabilities to be assumed by UAR (United Paragon) upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by APMC, the excess shall be recognized as gain of APMC [Section (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. 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 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 gains 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 for 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. aisadc Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner