Whether the Contemplated Merger Corporation Qualifies as a Tax-Free Merger under Section 34 (c) (2) of the Tax Code

December 28, 1992 BIR RULING NO. 377-92 34 (c) (2) (c) 30-91 377-92 Joaquin Cunanan & Co. 8th Floor, BA-Lepanto Building, 8747 Paseo de Roxas, Makati, Metro Manila Attention: Tomasa H . Lipana Partner Gentlemen : This refers to your letter dated June 8, 1992 requesting a ruling to the effect that the contemplated merger of your clients, Transmar Agencies, Inc. (AGENCIES) and Transmar Holdings, Inc. (HOLDINGS) with AGENCIES 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 AGENCIES and HOLDINGS are both domestic corporations duly registered with the Securities and Exchange Commission (SEC); that AGENCIES is currently engaged in business as general agent in the Philippines for international shipping companies, while HOLDINGS is engaged in business as real estate lessor; that considering that HOLDINGS is effectively a wholly-owned subsidiary of AGENCIES, merger of their operations becomes necessary and advantageous in order to realize economies in operations and efficiency in management due to the following: a. The merger will make possible the more productive use of the properties of the constituent corporations; b. The consolidation of the assets of the two corporations will allow the procurement of financing and credit facilities under more favorable terms; and c. It will result in the integration of the administrative facilities of the two companies and elimination of duplicate functions relating to the parallel activities; that pursuant to the plan of merger and articles of merger, HOLDINGS will transfer all its assets and liabilities to AGENCIES in exchange for new shares of the capital stock of AGENCIES at a ratio based on the respective book values of the two companies as of December 31, 1991; that the liabilities of HOLDINGS to be assumed by AGENCIES did not exceed the cost basis of the assets of HOLDINGS to be transferred to AGENCIES; 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 AGENCIES and HOLDINGS upon the transfer of the assets and liabilities of HOLDINGS to AGENCIES pursuant to the merger; "2. No gain or loss shall be recognized to HOLDINGS and their respective stockholders upon the distribution of AGENCIES shares to them in complete redemption of their HOLDINGS shares pursuant to the plan of merger; "3. The basis of the AGENCIES stock received by the stockholders of HOLDINGS is the same as their basis in HOLDINGS stocks surrendered in exchange therefore pursuant to the merger; "4. The basis of the properties of HOLDINGS in the hands of AGENCIES is the same as it would be in the hands of HOLDINGS; and "5. The transfer of assets by HOLDINGS to AGENCIES for AGENCIES 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 and the transaction is effected 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 (AGENCIES) will acquire all the assets and assume all the liabilities of HOLDINGS 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; 2. The transfer by HOLDINGS of all its assets and liabilities to AGENCIES 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 HOLDINGS upon the distribution of AGENCIES shares to HOLDINGS stockholders in complete redemption of their stocks under Section 34 (c) (2) of the Tax Code; cdpr 3. The basis of AGENCIES stocks received by the stockholders of HOLDINGS shall be the same as the basis of the HOLDINGS stocks surrendered in exchange therefor; 4. The basis of the assets received by AGENCIES shall be the same it would be in the hands of Holdings; 5. Moreover, the above mentioned 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 AGENCIES upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by HOLDINGS, the excess shall be recognized as gain of HOLDINGS (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 re-organization can be considered as merger under Section 34 (c) (2) of the said 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, 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. 9803-8, 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. 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, then this ruling shall be considered null and void. prcd Very truly yours, JOSE U. ONG Commissioner of Internal Revenue