Tax Consequence of the Transfer of All Assets and Liabilities in Exchange for the Shares of Stock

October 21, 1988 BIR RULING NO. 518-88 34-c-2 372-88 518-88 Gentlemen : This refers to your letter dated August 11, 1988 requesting confirmation of your opinion to the effect that no gain or loss shall be recognized in the merger of your clients, Berli Jucker Industries, Inc., (BJI) and First Pacific Metro Corporation (FPMC) under Section 34(c)(2) of the Tax Code, as amended. It is represented that BJI is a domestic corporation established and organized in June 1973 for the primary purpose of engaging in the business of manufacturing, importing, exporting, purchase, sale, trading, alteration, packaging, bottling, fabrication, or wholesale of goods, wares, merchandise and products of every kind and description, pharmaceuticals and chemicals; that FPMC (formerly Berli Jucker Philippines, Inc.) is a domestic corporation established and organized on January 9, 1980 for the primary purpose of carrying on business as general merchant, importer, agent, shipper, carrier, trader or dealer, on wholesale basis only, in all kinds of goods, products, and/or consumable whether manufactured or otherwise; that BJI has an authorized capital stock of Fifty Six Million Pesos (P56,000,000.00) divided into Seventy Thousand (70,000) shares of preferred stock with a par value of P100 each and Four Hundred Ninety Thousand (490,000) shares of common stock of BJI there have been duly subscribed and are now outstanding in the names of the following shareholders the number and class of shares indicated opposite their names: SHAREHOLDER NUMBER CLASS First Pacific International Limited, HongKong Corporation (FPIL) 208,827 Common Redeye Holdings, Inc. (RHI) 244,063 Common AFP-Retirement and Separation Benefits Systems (RSBS) 69,238 Preferred Julian Alzaga 1 Preferred Ernesto Carolina 1 Preferred Thomas Yasuda 1 Common Anthony Salim 1 Common Walter Meyer 1 Common David Turner 1 Common Rodolfo Salazar 1 Common Luis Garcia 1 Common Manuel Pangilinan 1 Common Albert del Rosario 1 Common Geronimo de los Reyes, Jr. 1 Common Herbert Dee 1 Common Edward Go 1 Common Oscar Hilado 1 Common Meliton Salazar 1 Common TOTAL 522,143 that with the exception of RHI, all the present shareholders of BJI have fully paid their respective subscriptions; that FPMC has an authorized capital stock of Two Hundred Fifty Six Million Pesos (P256,000,000) divided into Four Hundred Fifty Thousand (450,000) shares of preferred stock with a par value of P100 each and Two Million One Hundred Ten Thousand (2,110,000) shares of common stock with a par value of P100 each; that of said preferred and common stock of FPMC, there have been duly subscribed and are now outstanding in the name of the following shareholders the number and class of shares indicated opposite their names: cdtech SHAREHOLDER NUMBER CLASS First Pacific International Limited HongKong Corporation (FPIL) 1,003,161 Common Redeye Holdings, Inc. (RHI) 1,074,373 Common AFP-Retirement and Separation Benefits Systems (RSBS) 430,758 Preferred Julian Alzaga 1 Preferred Ernesto Carolina 1 Preferred Thomas Yasuda 1 Common Anthony Salina 1 Common Walter Meyer 1 Common David Turner 1 Common Rodolfo Salazar 1 Common Luis Garcia 1 Common Manuel Pangilinan 1 Common Alberto del Rosario 1 Common Geronimo de los Reyes, Jr. 1 Common Herbert Dee 1 Common Edward Go 1 Common Oscar Hilado 1 Common Meliton Salazar 1 Common TOTAL 2,508,307 that also with the exception of RHI, all the present shareholders of FPMC have fully paid their respective subscriptions; that as a result of the merger, BJI shall cease as a corporation by operation of law and FPMC shall remain as the surviving corporation and continue the activities and functions of BJI; that each of the shares of preferred/common stock of BJI then outstanding shall be converted into 1 share of preferred/common stock of FPMC; that the holders of all such outstanding shares of preferred/common stock of BJI who have fully paid their respective subscription for such shares and, by reason thereof, have been issued by BJI Certificates of Stock shall surrender the said BJI Certificates and, in exchange therefor, receive new certificates of stock for the numbers of shares of preferred/common stock of FPMC into which the shares represented by the Certificates of Stock surrendered shall have been converted as stated; that the authorized capital stock of FPMC would now be Three Hundred Three Million Forty Five Thousand Pesos (P303,045,00) divided into Five Hundred Thousand (500,000) shares of preferred stock with a par value of P100 each and Two Million Five Hundred Thirty Thousand Four Hundred Fifty (2,530,450) shares of common stock with a par value of P100 each; that after the conversion of each of the outstanding shares of preferred or common stock of BJI into the number of shares of preferred or common stock of FPMC, the shareholders of FPMC, the total number and total par value of shares outstanding in their names, and the total amount paid up by each shareholder shall be as follows: NAME TOTAL NO. TOTAL TOTAL OF SHARES PAR VALUES PAID UP FPIL 1,211,988 P121,198,800 P121,198,800 RHI 1,318,436 131,843,600 21,392,100 RSBS 499,996 49,999,600 49,999,600 Julian Alzaga 2 200 200 Ernesto Carolina 2 200 200 Thomas Yasuda 2 200 200 Anthony Salim 2 200 200 Walter Meyer 2 200 200 David Turner 2 200 200 Rodolfo Salazar 2 200 200 Luis Garcia 2 200 200 Manuel Pangilinan 2 200 200 Albert del Rosario 2 200 200 Geronimo de los Reyes, Jr. 2 200 200 Herbert Dee 2 200 200 Edward Go 2 200 200 Oscar Hilario 2 200 200 Meliton Salazar 2 200 200 3,030,450 P303,045,000 P192,593,500 ======== ========== ========== and that the foregoing 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 both corporations and their respective shareholders. In reply thereto, I have the honor to inform you that your opinion to the effect that the above reorganization is a merger, within the contemplation of Section 34(c)(2) of the Tax Code, because a corporation, First Pacific Metro Corporation (FPMC) acquired all the assets and assumed all the liabilities of Berli Jucker Industries, Inc. (BJI) 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 is hereby confirmed. Accordingly, the transfer by BJI of all its assets and liabilities to FPMC 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 BJI upon the distribution of FPMC shares to BJI stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to BJI stockholders upon the exchange of their stocks solely for FPMC stocks under Section 34(c)(2) of the Tax Code. The basis of the assets received by FPMC shall be the same as it would be in the hands of BJI. The basis of FPMC stocks received by the stockholders of BJI shall be the same as the basis of the BJI stocks surrendered in exchange therefor. aisadc If the total liabilities to be assumed by FPMC upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by BJI, the excess shall be recognized as gain to BJI (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 corporation, 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 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. cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner