Utilization of Information on Corporate Mergers and Reorganization in Tax Audit and Investigations

November 8, 1976 REVENUE MEMORANDUM ORDER NO. 52-76 SUBJECT : Utilization of Information on Corporate Mergers and Reorganization in Tax Audit and Investigations It has been observed that rulings authorizing tax-free exchanges, corporate mergers, consolidations or reorganization under Section 35 of the Tax Code are not utilized as reference in tax investigations of cases involving properties acquired in tax-free exchanges where the gain or loss therefrom is not recognized for income tax purposes. In order to protect the interest of the government, the following procedures are hereby promulgated: A. Law Division The Law Division shall compile all approved rulings issued by this Bureau authorizing tax-free exchanges under Section 35(c) of the Tax Code and shall furnish the Direct Taxes Division with at least two certified copies of such rulings, including all information and documents required to be submitted by the parties to the merger or consolidation. B. Direct Taxes Division The Direct Taxes Division shall systematically compile the certified copies of said rulings, statements and documents furnished by the Law Division and from such data it shall prepare, if feasible, a computation of the new basis of properties involved in the tax-free mergers or consolidations in accordance with Section 35(c) (4) of the Tax Code, to be used in determining gains or losses that may be realized from future disposition of such properties. From time to time the Direct Taxes Division shall furnish the various investigation units such as the audit divisions and regional offices with copies of such computation of the basis to be used as reference by revenue examiners in audits of income tax returns containing declarations of transactions in securities and other properties which may have been previously acquired thru a tax-free exchange. If the new basis cannot be computed because auxiliary information furnished with the rulings are inadequate, verification of such basis may be required in the regular audit of the income tax returns of the parties to the merger of consolidation. The Direct Taxes Division should be furnished with a separate report of verification of the basis of the properties acquired in tax-free exchange for future reference. The Assessment Branches of the Regional Office should likewise be furnished with similar data as reference in audit-reviewing reports of examination. C. Audit Divisions and Regional Offices The revenue examiners shall be instructed by their respective supervisors to tie in their investigations of income tax liabilities involving disposition of property previously acquired in a tax-free exchange with the information and guidelines hereafter to be compiled and formulated from time to time by the Direct Taxes Division. All internal revenue officers concerned are hereby enjoined to comply strictly with this revenue memorandum order. cd EFREN I. PLANA Acting Commissioner of Internal Revenue TAN 1456-040-3