BIR Ruling [UN-117-94]

April 4, 1994 BIR RULING [UN-117-94] Joaquin Cunanan & Co. 8th Floor, BA-Lepanto Bldg. 8747 Paseo de Roxas Makati, Metro Manila Gentlemen : This refers to your letter dated May 3, 1993 stating that Mead Johnson (Philippines), Inc. (Mead Johnson) is presently engaged in the manufacture and distribution of infant dietetics, adult nutritional vitamins and pharmaceutical products; that Bristol Myers Squibb (Phils.) Inc. (Bristol) is likewise engaged in the business of manufacturing and distributing of pharmaceutical and consumer products; that both companies are now under the common control of Bristol Myers Company U.S.A.,; that since Mead Johnson and Bristol are both ultimately owned and controlled by the same parent company, merger of their operations becomes necessary in order to realize economies in operations and management with Mead Johnson as the surviving corporation; that the capital stock of Mead Johnson and Bristol have been duly subscribed and paid and are now outstanding in the names of the following stockholders: cdtech MEAD JOHNSON NUMBER OF SHARES SUBSCRIBED Bristol-Myers Squibb Company U.S.A. 529,994 Jose M. de Lasa 1 Manuel G. Montecillo 1 Reynaldo M. Lacson 1 Edwin D. Feist 1 Carlito S. Villanueva 1 Hector A. Martinez 1 530,000 ========= BRISTOL NUMBER OF SHARES SUBSCRIBED Carlito S. Villanueva 1 Bristol-Myers Squibb Company 350,000 Bristol Laboratories Int'l S.A. 259,994 E.R. Squibb & Sons, Inc. 38,527 Linson Investment 16,550 Reynaldo M. Lacson 15 James. R. Sartori 14 Lawrence Woo 14 Sam Barker 14 Dominador Bonquin 14 Jose M. de Lasa 1 Edwin D. Feist 1 Manuel G. Montecillo 1 Hector A. Martinez 1 665,147 ========= that pursuant to the plan of merger, Bristol will transfer all its assets and liabilities to Mead Johnson in exchange for new shares of the capital stock of the latter; that the resulting exchange ratio is .91 share of Mead Johnson per one (1) share of Bristol or a total of 605,274 shares, of which the audited financial statements of Mead Johnson and Bristol as of December 31, 1992 was taken into account; that all fractional shares shall be paid for in cash, on the basis of the par value of Mead Johnson shares; and that the liabilities of Bristol to be assumed by Mead Johnson did not exceed the cost basis of the assets of Bristol to be transferred to Mead Johnson. In connection therewith, you now request for confirmation of your opinion as follows: "1. No gain or loss shall be recognized to Mead Johnson and Bristol upon the transfer of the assets and liabilities of Bristol to Mead Johnson pursuant to the merger; "2. No gain or loss shall be recognized to Bristol and their respective stockholders upon the distribution of Mead Johnson shares to them in complete redemption of their Bristol shares pursuant to the plan of merger; "3. The basis of the Mead Johnson stock received by the stockholders of Bristol is the same as their basis in Bristol stocks surrendered in exchange therefore pursuant to the merger; "4. The basis of the properties of Bristol in the hands of Mead Johnson is the same as it would be in the hands of Bristol; and "5. The transfer of assets by Bristol to Mead Johnson for the latter's 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 that the above reorganization is a merger within the contemplation of Section 34(c)(2) of the Tax Code because a corporation, Mead Johnson will acquire all the assets and assume all the liabilities of Bristol solely for stocks, the proposed 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 Bristol of all its assets and liabilities to Mead Johnson 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 Bristol upon the distribution of Mead Johnson shares to Bristol stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to Bristol stockholders upon the exchange of their stocks solely for Mead Johnson stocks under Section 34(c) (2) of the Tax Code. The basis of the assets received by Mead Johnson shall be the same as it would be in the hands of Bristol. The basis of the Mead Johnson stocks received by the stockholders of Bristol shall be the same as the basis of the Bristol stocks surrendered in exchange therefor. If the total liabilities to be assumed by Mead Johnson upon effective merger date exceed the historical or original acquisition cost (cost, basis) of the assets transferred by Bristol, the excess shall be recognized as gain of Bristol. (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 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 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 distributions 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; and (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 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 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 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. (BIR Ruling No. 250-91 dated November 15, 1991) cdtech Very truly yours, ALICIA P. CLEMENO Head Revenue Executive Assistant Officer-in-Charge (Legal Service)