Merger - Tax-Exempt

July 21, 1993 BIR RULING NO. 335-93 MERGER TAX-EXEMPT 34 (c) (2) (c) 10-93 35-93 Guzman, Bocaling & Co. 416 Regina Building Escolta, Manila This refers to your letter dated May 10, 1993 requesting for a ruling to the effect that the contemplated merger of your clients, Fine Chemicals Philippines, Inc. (FINE-CHEM) and Uni-Plastic International Corporation (UNI-PLASTIC) with UNI-PLASTIC as the surviving corporation qualifies as a tax-free merger under Section 34(c)(2) of the Tax Code, as amended. It is represented that UNI-PLASTIC and FINE-CHEM are both domestic corporations duly registered with the Securities and Exchange Commission (SEC); that UNI-PLASTIC is currently engaged in business as a manufacturer of plastic sheets and other plastic products (Poly-Vinyl Chloride Film), while FINE-CHEM is engaged also in the production of plastic sheets and other plastic products also known as Bi-Axially Oriented Poly-Propylene Film; that considering that the two (2) corporations have virtually the same line of operations and relatively produce the same line of products, and since FINE-CHEM has twenty-one percent (21%) interest in the equity of UNI-PLASTIC, the management of both corporations have unanimously agreed and deemed it to be more wise and prudent to merge the operations of the two (2) corporations with UNI-PLASTIC as the surviving corporation in order to economize operations and achieve greater efficiency in management due to the following reasons: cdta a. The merger will lead to an effective and maximum utilization of the properties of the two corporations; b. The pool of assets of the constituent corporations will help the corporations secure the loans and credit facilities under more auspicious and easier terms; and c. The merger will lead to the unification of the administrative facilities of the two companies thereby eliminating duplication of works and functions relating to similar activities. that pursuant to the plan of merger and articles of merger, FINE-CHEM will transfer all its assets and liabilities to UNI-PLASTIC in exchange for new shares of the capital stock of UNI-PLASTIC; that the combining corporations have mutually agreed that the basis of exchange will be the par value of the capital stock of the constituent companies as of December 31, 1992 since they have the same par value; that the total liabilities of FINE-CHEM to be assumed by UNI-PLASTIC did not exceed the cost basis of the total assets of FINE-CHEM to be transferred to UNI-PLASTIC; that the said merger has already been filed with and now being processed by the SEC. In connection therewith, you now request confirmation that: "1. No gain or loss shall be recognized to Uni-Plastic and Fine-Chem upon the transfer of the assets and liabilities of Fine-Chem to Uni-Plastic pursuant to the Plan of Merger; "2. No gain or loss shall be recognized to Fine-Chem and their respective stockholders upon the distribution of Uni-Plastic shares to them in complete redemption of their Fine-Chem shares pursuant to the Plan of Merger; "3. The basis of the Uni-Plastic stock that will be received by the stockholders of Fine-Chem is the same as their basis in Fine-Chem stocks that will be surrendered in exchange pursuant to the Plan of Merger; "4. The basis of the properties of Fine-Chem in the books of Uni-Plastic is the same as it would be in the books of Fine-Chem; and "5. The transfer of assets by Fine-Chem to Uni-Plastic for Uni-Plastic shares would not be considered as a transfer of property for an insufficient consideration subject to gift tax since there is no intention to donate on the part of any of the parties inasmuch as the transactions to be effected is purely for business reasons." In reply thereto, I have the honor to inform you as follows: 1. The above reorganization is a merger within the contemplation of Section 34(c)(2) and 5(b) of the Tax Code, as amended, because a corporation (UNI-PLASTIC) will acquire all the assets and assume all the liabilities of FINE-CHEM solely for stocks, the transaction undertaken being for a bonafide business purpose and not solely for the purpose of escaping the burden of taxation; 2. The transfer by FINE-CHEM of all its assets and liabilities to UNI-PLASTIC 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 said Code. No gain or loss shall be recognized to FINE-CHEM upon the distribution of UNI-PLASTIC shares to FINE-CHEM stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to FINE-CHEM stockholders upon the exchange of their stocks solely for UNI-PLASTIC stocks under Section 34(c)(2) of the Tax Code; 3. The basis of UNI-PLASTIC stocks received by the stockholders of UNI-CHEM shall be the same as the basis of the FINE-CHEM stocks surrendered in exchange therefor; 4. The basis of the assets received by UNI-PLASTIC shall be the same as it would be in the hands of FINE-CHEM; and 5. The abovementioned transactions shall not be subject to the gift tax as there is no intention to donate on the part of the parties. If the total liabilities to be assumed by UNI-PLASTIC upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by FINE-CHEM, the excess shall be recognized as gain of FINE-CHEM. [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. However, in order that the above-described reorganization can be considered as merger under Section 34(c)(2) of the same 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 corporations. 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 properties, including all stocks or securities transferred incident to the Plan. (3) A statement of the amount of stocks 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 stocks or securities transferred in the exchange; and (2) A statement in full of the amount of stocks 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 the 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., pp. 9-11). 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 stocks received as a consequence of the merger. aisadc 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. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue