Tax Consequence of Corporate Reorganizatio

August 9, 1988 BIR RULING NO. 372-88 34-c-2 327-88 372-88 Gentlemen : This refers to your letter dated June 16, 1988 requesting confirmation of your opinion to the effect that the merger of your clients, Novel Industries, Inc. (NOVEL), Vitamix Enterprises, Inc. (VITAMIX) and Metrolab Industries, Inc. (METROLAB) with Metrolab 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 Novel, Vitamix and Metrolab are all domestic corporations established and organized with the following common principal purpose, i.e., to engage in the business of manufacturing drugs, pharmaceutical and medicinal preparation, druggists, sundries, chemicals, extracts, tinctures, ointments, liniments, toilet articles, surgical and hospital supplies, orthopedic appliances, physicians and hospital supplies, cosmetics, soap, solvents and other articles or goods pertaining to the drug business; that said corporations have also common stockholders, directors and officers; that the merger shall be effected by transferring to Metrolab the assets and liabilities of Novel and Vitamix in exchange for shares of the former; that as a result of the merger, Novel and Vitamix shall cease as corporation by operation of law and Metrolab shall be the surviving corporation; that each of the shares of stock of Novel and Vitamix shall be converted into, share of stock of Metrolab; that the basis of valuation of the assets to be transferred will be the net book value as reflected in the Long Form Audit Report; that in exchange for the assets of Novel and Vitamix, Metrolab will then issue shares from its authorized capital stock with a par value of P10.00 per share, at a premium of P990.00 per share or a total issued value equal to the net asset value: that the shareholders of record of Novel and Vitamix shall surrender their certificates of stock covering their respective shares in the capital stock of Novel and Vitamix and receive, in exchange for the said certificates, new certificate of stocks for the number of shares of capital stock of Metrolab into which the shares covered by the certificates of stock surrendered shall have been converted; and that the merger is being effected to the end that greater efficiency and economy of management may be accomplished and, generally to the advantage and welfare of said corporations and their respective shareholders. cdti 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, Metrolab acquired all the assets and assumed all the liabilities of two (2) corporations, Novel and Vitamix solely for stocks, the transaction being undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by Novel and Vitamix of all their assets and liabilities to Metrolab 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 Novel and Vitamix upon the distribution of Metrolab shares to Novel and Vitamix stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to Novel and Vitamix stockholders, upon the exchange of their stocks solely for Metrolab stocks under Section 34(c)(2) of the Tax Code, as amended. The basis of the assets received by Metrolab shall be the same as it would be in the hands of Novel and Vitamix. The basis of Metrolab stocks received by the stockholders of Novel and Vitamix shall be the same as the basis of the Novel and Vitamix stocks surrendered in exchange therefor. If the total liabilities to be assumed by Metrolab upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by Novel and Vitamix, the excess shall be recognized as gain to Novel or Vitamix. (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: (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 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 exchanges, 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 the 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. cdti Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner