Tax Consequence of the Proposed Merger of Seamark Enterprises, Inc. and Purefoods Corporation

November 15, 1991 BIR RULING NO. 250-91 34 (c) (2) (c) 237-89 250-91 Gentlemen : This refers to your letter dated July 9, August 6 and September 6, 1991 requesting a ruling on the tax consequence of the proposed merger of Seamark Enterprises, Inc. (Seamark) and Purefoods Corporation (PFC). cdt It is represented that after a series of negotiations, the parties have finally agreed that PFC shall pursue its acquisition of the Seamark ice cream business through scheme "B" as discussed in your earlier letter-request dated July 9, 1991; that Seamark shareholders will be issued PFC stocks in the exchange for the Seamark shares; that the corporation parties to the merger are engaged in related complimentary line of business or corporate activities; that Seamark has been in the ice cream business since 1979; that on the other hand, PFC is one of the biggest companies engaged in food manufacturing but had not yet ventured into the ice cream business up to this time; that the other big food manufacturing concerns, namely San Miguel Corporation, CFC Corporation and RFM Corporation already have their own line of ice cream business; that as a matter of fact, when Selecta was recently put up for sale, PFC had expressed serious interest in acquiring it but, unfortunately, RFM Corporation successfully outbidded PFC; that PFC's interest in starting a new line of business in ice cream did not materialize overnight; that PFC's interest in the ice cream business was a result of the dire need to make its presence felt in the midst of intensified competition among the big food manufacturers in our country today; that since Seamark started its ice cream business twelve (12) years ago, it has built up two strong brands "Sorbetero" and "Coney Island"; that despite limited advertising and distribution, these products have gained considerable acceptance by consumers; that recent development, however, have made it virtually impossible for Seamark to complete effectively; that the ice cream industry is now dominated by three very large and well-funded companies, San Miguel Corporation, CFC Corporation and recently, RFM Corporation; that in terms of the members of nationwide dealers alone, Seamark has only 1,000 dealers while Magnolia has 8,000 dealers all over the country; that Seamark presently maintains only 15 refrigerated vans which cost approximately P1.5 million per units, while SMC's Magnolia owns about 50 units of these refrigerated vans; that Seamark suffers even more by comparison if their annual advertising budget is taken into consideration. Seamark's budget is only a mere close to P3.5 million while that of SMC for Magnolia is P40 million and RFM Corporation for Selecta is roughly between P25 million to P40 million; that definitely the presence of the three huge corporations in the ice cream business has made fair competition impossible for Seamark; that Seamark has reached its maximum production capacity and effective distribution network; that Seamark has therefore realized its current untenable size and, in order to survive under present circumstances, it has no choice but to expand; that unfortunately, Seamark stockholders do not have the financial resources to undertake an expansion; that internal studies made by Seamark shows that a fresh P240 million must be injected in order to place Seamark on an even footing with its big competitors; that of the P240 million, P110 million will be used for the purchase of new manufacturing equipment; P100 million for the additional distribution facilities such as refrigerated trucks and freezers and P30 million for additional working capital; that there is simply no way for the present Seamark stockholders to come up with said money; that the proposed merger of Seamark with PFC is actually a matter of survival; that on the part of PFC merger with Seamark brings about the advantages and economies of scale in such areas as purchasing, refrigerated storage and distribution coverage; that PFC realizes the used to get into the ice cream business where its other big competitors have done very well; and that the acquisition by PFC of Seamark is the quickest and easiest solution to its business objective of penetrating the ice cream market. 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, PFC will acquire all the assets and assume all the liabilities of Seamark 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 Seamark of all its assets and liabilities to PFC 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 Seamark upon the distribution of PFC shares to Seamark stockholders in complete redemption of their stocks under Section 34 (c) (2) of the Tax Code. No gain or loss shall be recognized to Seamark stockholder upon the exchange of their stocks solely for PFC stocks under Section 34 (c) of the Tax Code. aisadc The basis of the assets received by PFC shall be the same as it would be in the hands of Seamark. The basis of PFC stocks received by the stockholders of Seamark shall be the same as the basis of the Seamark stocks surrendered in exchange therefor. If the total liabilities to be assumed by PFC upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by Seamark, the excess shall be recognized as gain of Seamark [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 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 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 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 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. cdti 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE U. ONG Commissioner