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

December 9, 1991 BIR RULING NO. 264-91 34 (c) (2) 064-91 264-91 Gentlemen : This refers to your letter dated October 10, 1991 requesting for confirmation of your opinion that in accordance with Section 34 (c) (2) of the Tax Code, as amended, no gain or loss shall be recognized in the merger of Electrical Components Manufacturing, Inc. (ECMI), Republic Service Corporation (RSC), Component Products, Inc. (CPI) and Industrial Copper Corporation (ICC) with and into Concepcion Industries, Inc. (CII). It is represented that CMI is a domestic corporation duly organized on April 12, 1973 and existing under and by virtue of Philippine Laws, with the following primary purposes: "To carry on the business of manufacturing, distributing, importing and exporting all types and kinds of components for electrical appliances, devices and products." that RSC is a domestic corporation established and organized on the February 10, 1969, with the following primary purposes: "To engage in the business of delivering, installing, maintaining, servicing, repairing and/or reconditioning of television sets, radios, transistors, and other electronics equipment and devices, airconditioners, refrigerators, freezers, electric ice boxes, floor polishers, vacuum cleaners, and similar household appliances as well as accessories and parts thereof; to acquire by purchase, lease, to construct erect and install machinery and other buildings and structures of whatever kind and character suitable or necessary to accomplish the above indicated purpose; to acquire and hold by purchase or otherwise shares of capital stock of other entities whose products are manufactured will be serviced by this corporation, and in general, do and perform all and singular things and works which are necessary, incidental or connected with the above business and object of this corporation." that CPI is a domestic corporation established and organized on April 3, 1973 with the following primary purpose: "To carry on the business of manufacturing, distributing, importing and exporting components of any type or kind for motors, machines, electrical appliances, automobiles, trucks and other transportation, industrial and commercial equipment." that ICC is a domestic corporation established and organized on July 13, 1971 with the following primary purpose: "To own, operate, conduct and maintain a diversified general manufacturing business for the production, manufacture, assembly, construction, repair, buying, selling and otherwise trading and dealing in shells, tubes and hollowed products made of copper, aluminum, brass, stainless steel and other materials of similar nature and in electrical, electronic, chemical and metallurgical apparatus, electronic motors, alternators, motor control, circuit breakers, machines, appliances, equipment, fixture, accessories, parts, goods, supplies and in related and kindred materials, products, systems and services for industry, commerce, agriculture, government, the community and the home; to make and carry out contracts for the manufacture, assembly, repair, purchase, sale and installation of all such articles, to equip, connect up and furnish plants, buildings, houses and structures of every kind, nature and description with such articles; and to do any and all things that may be necessary or incidental to the carrying on, management and operation of the foregoing business. (As amended on July 13, 1973)" that CII is a domestic corporation established and organized on November 28, 1961 with the following primary purpose: "To own, conduct and maintain a diversified general manufacturing business for the building, manufacture, assembly, construction, repair, buying, selling and otherwise trading and dealing in electrical, chemical and metallurgical apparatus, machines, appliances, equipment, fixtures, accessories, parts, goods, supplies, and in related and kindred materials, products, systems and services for industry, commerce, agriculture, government, the community and the home; to make, carry out contracts for the manufacture, assembly, repair, purchase, sale and installation of all such articles; to equip, connect up and furnish plants, buildings, houses and structures of every kind, nature and description with such kind, nature and description with such articles; and to do any and all things that may be necessary to incidental to the carrying on, management and operation of the foregoing business. (As amended on April 2, 1972)" cdta that ECMI has an authorized capital stock of FOUR MILLION EIGHT HUNDRED THOUSAND PESOS (P4,800,000.00), divided into Forty-Eight Thousand (48,000) common shares with a par value of One Hundred Pesos (P100.00) per share; that of the said shares, Twenty-Eight Thousand (28,000) shares have been duly subscribed, issued and outstanding in the names of the following stockholders: NAME OF STOCKHOLDERS NUMBER OF SHARES Concepcion Industries, Inc. 28,495 Milagros C. Tan 1 Isidro Garcia 1 Marilou A. Puse 1 Domingo P. Aquino 1 Raul T. Concepcion 1 28,500 shares ========== that RSC has an authorized capital stock of TEN MILLION PESOS (P10,000,000.00), divided into One Million (1,000,000.00) common shares with a par value of Ten Pesos (P10.00) per shares; that of the said shares, Nine Hundred Thirty-Nine Thousand Nine Hundred Fifteen (939,915) shares have been duly subscribed, issued and outstanding in the names of the following stockholder: NAME OF STOCKHOLDERS NUMBER OF SHARES Concepcion Industries, Inc. 939,910 Raul T. Concepcion 1 Reynaldo A. Concepcion 1 Rafael G. Hechanova 1 Raul Stephen Concepcion 1 Eumelia C. Hechanova 1 939,915 shares ========== that CPI has an authorized capital stock ONE MILLION PESOS (P1,000,000.00), divided into Ten Thousand (P10,000) common shares with a par value of One Hundred Pesos (P100.00) per share; that of the said shares, Ten Thousand (10,000) shares have been duly subscribed, issued and outstanding in the names of the following stockholders: NAME OF STOCKHOLDERS NUMBER OF SHARES Concepcion Industries, Inc. 9,995 Milagros C. Tan 1 Isidro Garcia 1 Marilou Puse 1 Raul Stephen Concepcion 1 Domingo P. Aquino 1 10,000 shares ========== that ICC has an authorized capital stock of TEN MILLION PESOS (10,000,000.00), divided into One Hundred Thousand (100,000) common shares with a par value of One Hundred Pesos (P100.00) per share; that of the said shares, One Hundred Thousand (100,000) shares have been duly subscribed, issued and outstanding in the names of the following stockholders: NAME OF STOCKHOLDERS NUMBER OF SHARES Concepcion Industries, Inc. 50,288 Republic Service Corporation 49,707 Raul T. Concepcion 1 Reynaldo Concepcion 1 Raul Stephen Concepcion 1 Rafael G. Hechanova 1 Eumelia C. Hechanova 1 100,000 shares ========== that CII has an authorized capital stock of ONE HUNDRED MILLION PESOS (P100,000,000.00), divided into One Hundred Thirty Thousand One Hundred Fifty (130,150) Class A voting common shares and Eight Hundred Sixty-Nine Thousand Eight Hundred Fifty (869,850) Class B non-voting common shares with a par value of One Hundred Pesos (P100.00) per shares; that of the said shares, Five (5) Class A voting shares and Six Hundred Seventy-Eight Thousand Nine Hundred Thirty-Six (678,939) Class B non-voting shares have been duly subscribed, issued and outstanding in the names of the following stockholders: cdt NAME OF STOCKHOLDERS NUMBER OF SHARES Horizon Realty and Development Corporation 67,830 Arcon Developers 67,830 Foresight Realty and Development Corporation 67,829 Hyland Realty and Development Corporation 67,829 Raul T. Concepcion 1 Reynaldo A Concepcion 1 Rafael G. Hechanova 1 Raul Stephen Concepcion 1 Eumelia C. Hechanova 1 271,323 shares ========== that the plan to merge ECMI, CPI and ICC with and into CII purports to streamline operations and improve the profitability of CII by maximizing the utilization of available assets and cutting down operational costs; that as a result of the merger, the corporate existence of ECMI, RSC, CPI and ICC will cease by operation of law and all assets, properties, rights, interest, immunities and privileges of ECMI, RSC, CPI and ICC shall be assigned, transferred and conveyed into CII being the surviving corporation; and finally, that in exchange for the assignment, transfer of conveyance of all these assets, properties, rights, interests, immunities and privileges, CII shall issue its shares of stocks to all the stockholders of ECMI, RSC, CPI and ICC whose names appear on record in its book as of the effective date of merger at such number and value equivalent to their shareholdings in each of the absorbed corporations. In reply, please be informed that this Office confirms your opinion to the effect that the above reorganization is a merger within the contemplation of Section 34 (c) (2) of the Tax Code because CII will acquire all the assets and assume all the liabilities of ECMI, RSC, CPI and ICC solely for stocks, and for a valid bona fide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by ECMI, RSC, CPI and ICC of all its assets and liabilities to CII 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 ECMI, RSC, CPI and ICC upon the distribution of CII shares to ECMI, RSC, CPI and ICC stockholders in complete redemption of their stocks under Section 34 (c) (2) of the Tax Code. No gain or loss shall be recognized to ECMI, RSC, CPI and ICC stockholders upon the exchange of their stock solely for CII stocks under Section 34 (c) (2) of the Tax Code. The basis of the assets received by CII shall be the same as it would be in the hands of ECMI, RSC, CPI and ICC. The basis of CII stocks received by the stockholders of ECMI, RSC, CPI and ICC stocks surrendered in exchange therefor. cdtech If the total liabilities to be assumed by CII upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by ECMI, RSC, CPI and ICC, the excess shall accordingly be recognized as gain to ECMI, RSC, CPI and ICC. (Section 34 (c) (4) (b), Tax Code, as amended by PD 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 above-mentioned 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 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 the 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 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 properties 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 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. The parties shall also cause to be annotated on the Transfer Certificate of Titles and at the back of the Certificate of the Stocks, the date of the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock involved, and the fact that no gain or loss was recognized as a result of such merger. The certificates of stocks to be issued to ECMI, RSC, CPI and ICC stockholders in redemption of their stocks are, in all probability, original issued which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. Moreover, the aforesaid transaction is not subject to the value-added tax under Title IV of the Tax Code, as amended by Executive Order No. 273 and as implemented by Revenue Regulations No. 5-87. cdti Finally, for purposes of the Value-Added Tax (VAT), the unused input tax of the dissolved corporations as of the date of merger shall be absorbed by CII as the surviving corporation (Sec. 5 (b) (3), Revenue Regulations No. 5-87) Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner (Officer-in-Charge)