Merger Agreement Entered into by Ortigas & Company, Limited Partnership

December 3, 1959 BIR RULING NO. 607-59 Messrs. Stewart, Cunanan & Company P. O. Box 2288, Manila Gentlemen : This has reference to your letter dated April 7, 1959, requesting a ruling whether or not your client, Ortigas & Company, Limited Partnership, can enter into a merger agreement within the purview of section 35(c)(2) of the Tax Code, without incurring income tax consequences to your client or to its shareholders. aisadc The pertinent facts contained in the aforesaid letter are reproduced hereunder: "The present capital of the company is as follows (December 31, 1958): Capital of the general partners 5 shares of stated values P2,500 Capital of the limited partners 442, 734 shares of P10 par value issued and outstanding 4,427,340 4,429,840 Capital surplus 98,494 Earned surplus 2,438,087 P6,966,421 ======== "It is proposed to form a stock corporation with an authorized capital of some P20,000,000. A portion of the shares of this corporation will be issued to the general partners and limited shareholders of the company in exchange for which the new corporation will acquire the assets and assume the liabilities of old company. The latter will then be dissolved. "The present company is treated as a corporation for income tax purposes, as provided in Section 84(b) of the National Internal Revenue Code: '(b) The term "corporation" includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas on participacion), associations or insurance companies, but does not include duly registered general copartnerships (companias colectives).' "In view of this treatment it will be appreciated if we may be advised whether the proposed merger may be carried out within the provisions of Section 35(c)(2) of the Internal Revenue Code." Additional facts were also submitted in your letter of November 14, 1959 which are reproduced hereunder: "In connection with our query of April 7, 1959 regarding the proposed merger of the above company with a new corporation to be organized as soon as your office rules that the merger is within the provisions of section 35(c)(2) of the Tax Code, we are submitting, for purposes of clarification, the following additional information on the procedure to be followed in effecting the merger: "1. A new corporation with an authorized capital stock of some P20,000,000 will first be organized for the purpose not only of engaging in the real estate business to which the present partnership is limited by its articles but also to invest in industrial or commercial undertakings and engage in other activities allowed by the Corporation Law. "2. After the new corporation has been organized and is already functioning, the contemplated merger will be effected by: '(a) The transfer of all the assets and liabilities of the limited partnership to the new corporation in exchange for the shares of stock of the latter, and '(b) the limited partnership will then exchange the shares of stock received from the corporation with its own shares of stock in the hands of the shareholders, after which the limited partnership will be dissolved.' "In this connection, it is informed that the limited partnership which is a "sociedad en comandita" operates in the same way as a corporation: it has a capital represented by shares; it carries surplus accounts in its books for undistributed profits; it has a board of directors which has the sole authority to declare dividends out of the earned surplus; and it pays income tax as a corporation. "The only purpose behind the contemplated merger is to expand the scope of business of the partnership which is presently limited to the disposal of the tract of land known as the Mandaluyong Estate. As may be seen from the Articles of Copartnership of which we furnished you with a copy, the life of the partnership is unlimited as it can be dissolved only upon agreement of the general partners." In reply thereto, I have the honor to inform you that your query is answered in the affirmative provided that the contemplated merger is undertaken not solely for the purpose of escaping the burden of taxation. However, as your client has an accumulated surplus not yet distributed and taxed to the individual shareholders, the same surplus should appear in the books and records of the newly formed corporation brought by merger as accruing to your client's shareholders. cdt Very truly yours, (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue