Tax Consequence of a Reorganization of a Corporation

July 15, 1988 BIR RULING NO. 327-88 34-c-2-c 383-87 327-88 Gentlemen : This refers to your letter dated June 20, 1988 requesting confirmation of your opinion to the effect that the merger of your clients, General Milling Corporation (GMC), Holland Milk Products Inc. (HOMPI) and Basic Food Corporation (BFC) with GMC as the surviving corporation qualifies as a tax-exempt reorganization under Section 34(c)(2) of the Tax Code, as amended. It is represented that GMC, HOMPI and BFC all domestic corporations have adopted a Plan of Merger; that pursuant to the Plan of Merger, HOMPI and BFC will transfer all their assets and liabilities to GMC in exchange for new shares of stocks of GMC; that the new shares of stock of GMC will be issued directly to the stockholders of HOMPI and BFC; that since the GMC holds 25% of BFC, the shares pertaining to such 25% will be held by GMC as treasury stock; that in exchange, stockholders of HOMPI and BFC will surrender their HOMPI and BFC stock to HOMPI and BFC which will completely redeem all their outstanding stock in the hands of their respective stockholders and will go out of existence upon SEC approval of the merger; that the exchange ratios to be used are 1.33 HOMPI shares to 1 GMC share (1.33:1) and 1.01 BFC share to 1 GMC share (1:01:1) that the exchange ratios take into account the audited financial statements of GMC, HOMPI BFC as of February 29, 1988 and the sound values of fixed assets of GMC, HOMPI and BFC as of February 29, 1988 as indicated in the appraisal report prepared by the Asian Appraisal Inc.; that the liabilities of HOMPI and BFC to be assumed by GMC do not exceed the cost basis of the assets of HOMPI and BFC to be transferred to GMC; that fractional shares shall not be issued and such fraction shall be paid in cash; that GMC, HOMPI and BFC are all operating at the net income position; that the business activities of the three companies are parallel and complementary; that the merger is desirable and advantageous to GMC, HOMPI and BFC their respective stockholders for the following reasons: (1) the merger will make possible a more productive use of the properties of the constituent corporations; (2) the consolidation of the assets of the three (3) corporations will allow the procurement of financing and credit facilities under more favorable terms; (3) the integration of the administrative facilities of the (3) companies will result in greater economy of scale and efficiency of operations; and (4) the merger will eliminate duplicate functions relating to parallel activities. cdta 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 (GMC) acquired all the assets and assumed all the liabilities of two (2) corporation HOMPI and BFC 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 HOMPI and BFC of all their assets and liabilities to GMC 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 HOMPI and BFC upon the distribution of GMC shares to HOMPI and BFC stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to HOMPI and BFC stockholders upon the exchange of their stocks solely for GMC stock under Section 34(c)(2) of the Tax Code. The basis of the assets received by GMC shall be the same as it would be in the hands of HOMPI and BFC. The basis of GMC stock received by the stockholders of HOMPI and BFC shall be the same as the basis of the HOMPI and BFC stocks surrendered in exchange therefor. If the total liabilities to be assumed by GMC upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by HOMPI and BFC, the excess shall be recognized as gain of HOMPI or BFC (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 re-organization 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: cdti (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-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. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner