CIR V. RUFINO (TAX)

Issue: Whether or not the merger was formed to evade the capital gains tax.

NO.

We sustain the CTA. We hold that it did not err in finding that no taxable gain was derived by private respondent from the questioned transaction.

Contrary to the claim of the petitioner, there was a valid merger although the actual transfer of the properties subject of the Deed of Assignment was not made on the date of the merger. In the nature of things, this was not possible. Obviously, it was necessary for the Old Corporation to surrender its net assets first to the New Corporation before the latter could issue its own stock to the shareholders of the Old Corporation because the New Corporation had to increase its capitalization for this purpose..

The Court finds no impediment to the exchange of property for stock between the two corporations being considered to have been effected on the date of the merger. The certificates of stock subsequently delivered by the New Corporation to the private respondents were only evidence of the ownership of such stocks. Although these certificates could be issued to them only after the approval by the SEC of the increase in capitalization of the New Corporation, the title thereto, legally speaking was transferred to them on the date the merger took effect, in accordance with the Deed of Assignment.

The basic consideration of course, is the purpose of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation.

It has been suggested that one certain indication of a scheme to evade the capital gains tax is the subsequent dissolution of the new corporation after the transfer to it of the properties of the old corporation and the liquidation of the former soon after.

We see no such furtive intention in the instant case. It is clear, in fact, that the purpose of the merger was to continue the business of the Old Corporation, whose corporate life was about to expire, through the New Corporation to which all the assets and obligations of the former had been transferred. what argues strongly, indeed, for the New Corporation is that it was not dissolved after the merger. On the contrary, it continued to operate the places of amusement originally owned by the Old Corporation.

Our ruling then is that the merger in question involved a pooling of resources aimed at the continuation and expansion of business and so came under the letter and intendment of the NIRC, as amended, exempting from the capital gains tax of property affected under lawful corporate combinations.