Reorganization/Merger for a Bonafide Business Purpose is a Tax-Free Exchange

December 3, 1993 BIR RULING NO. 472-93 REORGANIZATION/MERGER FOR A BONAFIDE BUSINESS PURPOSE IS A TAX-FREE EXCHANGE 34 (c) (2) (c) 250-91 472-93 Tan & Venturanza 3rd Floor, Alcco Bldg. Ortigas Ave., Greenhills San Juan, Metro Manila Attention: Atty . Ma . Gracia P . Tan This refers to your letter dated October 15, 1993 stating that Tagaytay Highlands Corporation (THC) and Belle Resources Corporation (BRC) are both domestic corporations, the primary purpose of which are to invest in, purchase, or otherwise acquire and own, hold, use, sell, assign, transfer, mortgage, pledge, exchange or otherwise dispose of, as may be permitted by law, real and personal property of every kind and description; that on August 25, 1993, THC and BRC executed a Plan of Merger whereby BRC is the surviving corporation; that with the merging of the two corporations, the outstanding shares of stock of THC shall, after the effective merger date and upon surrender by the registered owners of the shares of stock, be exchanged with shares of stock of BRC at the ratio of eight (8) shares of BRC for one (1) share of THC, as determined on the basis of the amount of the net assets of THC, as of July 31, 1993; that upon effective merger date, THC's corporate existence shall cease and all its rights, privileges, powers and franchises, all its properties, real and personal, including receivables on whatever account, and all and every other interest of THC shall be assumed by, and be vested in BRC without further act or deed; that all debts, liabilities and obligations of THC in the amount of P37,216,936.00, as well as pending claims, actions and proceedings shall likewise vest in, attach to and be assumed by BRC, and may be enforced against BRC as if they had been originally contracted or incurred by it without further act or deed; and that the merger will achieve mutually advantageous and beneficial business purposes, such as but not limited to (1) increased financial strength; and (2) rationalization of overall business expenses, particularly administrative expenses. In connection therewith, you now request confirmation of your opinion that "(1) The merger of THC and BRC qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 34(c)(2) of the Tax Code, such that no gain or loss shall be recognized to THC and BRC upon the assumption of the assets and liabilities of THC and BRC pursuant to the merger; "(2) No gain or loss shall be recognized by the shareholders of THC upon the issuance and distribution of BRC's shares to them in exchange for their shares in THC pursuant to and as a consequence of the merger; "(3) The basis of the BRC shares of stock to be received by the stockholders of THC shall be the same as their basis in THC shares of stock surrendered and exchanged pursuant to the plan of merger; "(4) The basis of the properties of THC in the hands of BRC shall be the same as it would be in the hands of THC; "(5) The assumption by BRC of the assets of THC will 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 either party and the transaction is purely for legitimate business purposes; "(6) The assumption by BRC of the assets of THC shall not be subject to the documentary stamp tax under Sec. 196 of the Tax Code, as amended." 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 (50) (b) of the Tax Code because a corporation, BRC will acquire all the assets and assume all the liabilities of THC solely for stocks, the transaction to be undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by THC of all its assets and liabilities to BRC 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 THC upon the distribution of BRC shares to THC stockholders in complete redemption of their stocks solely for BRC stocks under Section 34(c) of the Tax Code. The basis of the assets received by BRC shall be the same as it would be in the hands of THC. The basis of the BRC stocks received by the stockholders of THC shall be the same as the basis of the THC stocks surrendered in exchange therefor. If the total liabilities to be assumed by BRC upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by THC, the excess shall be recognized as gain of THC [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 Agreement of Merger executed by BRC and THC is not subject to documentary stamp 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 reorganization can be considered as 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 properties, including all stocks or securities, transferred incident to the plan. (3) A statement of the amount of stocks or securities and other properties 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 properties received shall be stated on the basis of the fair market value thereof at the date of the exchange. cd i (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 properties 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 gains 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 properties 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 properties (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 in 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 properties 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 stocks 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. cdt LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue