Tax Consequence of Merger of Three Companies

October 23, 1987 BIR RULING NO. 327-87 35 (c) (2) 138-86 327-87 Gentlemen : This refers to your letter dated September 29, 1987 requesting a ruling on the tax consequence of the merger of Union Lead and Oxide Corporation (Union), Terramar Equipment Corporation (Terramar) and Genoriental Marketing Corporation (Genoriental). It is represented that in the merger of the three companies, all the assets and business of Terramar and Genoriental will be transferred at their current fair market value to Union which will survive the merger; that the Union's authorized capital stock consists of 200,000 shares with a par value of P100.00 per share of which 58,000 shares are subscribed; that Terramar's authorized capital stock consists of 1,500,000 shares with a par value of P10.00 per share of which 420,000 shares are subscribed; that Genoriental's authorized capital stock consists of 20,000 shares with a par value of P100.00 per share of which 4.704 shares are issued and outstanding; that the comparative stockholder's equity and book value per share are as follows: Total Equity Book Value/share Union P5,072,773 P129.13 Terramar 1,414,150 8.98 Genoriental 538,506 114.48 that union has 142,000 unsubscribed shares and will issue 10,951 shares to the Terramar shareholders at the ratio of one(1) Union share for every 14.38 Terramar shares in exchange for the transfer and conveyance by Terramar of all its assets and business, including liabilities; that Union will likewise issue 4,170.26 shares to Genoriental's shareholders at the ratio of one (1) Union share for every 1.18 Genoriental shares in exchange for the transfer and conveyance by Genoriental of all its assets and business, including liabilities. The business activities of the three companies are parallel and complementary as indicated by the fact that Union manufactures lead based chemicals used by battery, paint, gold mining, ceramic and PVC companies; that Terramar manufactures zinc and aluminum anodes for the shipping and ship-repair companies; and Genoriental imports and sells industrial goods and supplies. atdc Based on the foregoing facts, you now request confirmation of your opinion to the effect that: "1. The merger of all three companies in which all the assets and business of Terramar and Genoriental will be transferred at their current fair market value to Union which will survive the merger is an exempt transaction under Sec. 35 (c)(2) of the Tax Code. "2. Such transaction will not result in any realization of income to Terramar or Genoriental, or any other shareholders, and that there is no taxable gain or loss resulting from such transaction. "3. Such transfer will not be considered as a transfer of property for an insufficient consideration subject to gift tax." In reply, please be informed that the above reorganization is a bonafide merger of Union, Terramar and Genoriental within the contemplation of Section 35 (c)(2) and 5(b) of the Tax Code, as amended, because the transfer of properties by Terramar and Genoriental in exchange for shares of stock of Union is for a bonafide business purpose and is not intended to evade the burden of taxation. Consequently, the transfer by Terramar and Genoriental of all their assets and liabilities to Union, 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 be recognized to Terramar and Genoriental upon the distribution of Union's shares to Terramar and Genoriental stockholders in complete redemption of their stocks under Section 35 (c)(2) of the Tax Code. No gain or loss shall also be recognized to Terramar and Genoriental stockholders upon the exchange of their stocks solely for Union stocks under Section 35(c)(2) of the Tax Code. The basis of the assets received by Union shall be the same as it would be in the hands of Terramar and Genoriental. The basis of Union stocks received by the stockholders of Terramar and Genoriental shall be the same as the basis of Terramar and Genoriental stocks surrendered in exchange therefor. If the total liabilities to be assumed by Union upon the effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by Terramar and Genoriental, the excess shall be recognized as gain of Terramar and Genoriental. [Sec. 35(c)(4)(b), Tax Code, as amended] 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 transaction shall not likewise be subject to the gift tax as transfer of property for an insufficient consideration because there is no intention to donate on the part of any of the parties. Moreover, to be considered a merger under Section 35(c)(2) of the Tax Code, the parties to the merger should comply with the following requirements: A. The plan of merger 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 merger, shall file, as part of its return for the taxable year within which the merger occurred, a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the merger, including: 1. A copy of the plan of merger, together with a statement executed under the penalties of perjury, showing in full the purposes thereof and 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 distributions 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 merger, who received stocks or securities and other property or money upon a tax-free exchange in connection with the merger shall incorporate in its 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 corporation merger 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-HI963 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 a consequence of the merger. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner