CIR V RUFINO retroact from January 1, 1959.

New ETC’s Board approved the merger and the Deed of

G.R. Nos. L-33665-68 Assignment on January 12, 1959 and all changes duly registered with the SEC.
February 27, 1987
Topic: Computation of the Amount of Gain (Loss); When No Gain/Loss Shall be Recognized; • The BIR, after examination, declared that the merger was not undertaken for a bona fide
Merger/Consolidation/Control Securities business purpose but only to avoid liability for the capital gains tax on the exchange of the
Petitioners: COMMISSIONER OF INTERNAL REVENUE, petitioner, old for the new shares of stock. He then imposed deficiency assessments against the private
Respondents: VICENTE A. RUFINO and REMEDIOS S. RUFINO, ERNESTO D. RUFINO and ELVIRA B. respondents, the Rufinos. The Rufinos requested for a reconsideration, which was denied.
RUFINO, RAFAEL R. RUFINO and JULIETA A. RUFINO, MANUEL S. GALVEZ and ESTER R. GALVEZ, Therefore, they elevated their matter to the CTA, who reversed the judgment of the CIR,
and COURT OF TAX APPEALS, respondents. saying that they found that there was “no taxable gain derived from the exchange of old
Ponente: CRUZ, J. stocks simply for new stocks for the New Corporation” because it was pursuant to a valid
plan of reorganization. The CIR raised it to the SC on petition for review on certiorari.

DOCTRINE: “…the second type of merger defined by Section 35 of the Tax Code as "the acquisition • In support of its position that the Deed of Assignment was concluded by the private
by one corporation of all or substantially all of the properties of another corporation solely for respondents merely to evade the burden of taxation, the petitioner points to the fact that
stock," which is precisely what happened in the present case. …the merger, being genuine, the New Corporation did not actually issue stocks in exchange for the properties of the Old
exempted them under the law from such tax.” Corporation at the time of the supposed merger on January 9, 1959. The exchange, he says,
was only on paper. The increase in capitalization of the New Corporation was registered with
the Securities and Exchange Commission only on March 5, 1959, or 37 days after the Old
Corporation expired on January 25, 1959. Prior to such registration, it was not possible for
the New Corporation to effect the exchange provided for in the said agreement because it
FACTS:
was capitalized only at P200,000.00 as against the capitalization of the Old Corporation at
P2,000,000.00. Consequently, as there was no merger, the automatic dissolution of the Old
• This is a petition for review on certiorari of the CTA decision which absolved petitioners from Corporation on its expiry date resulted in its liquidation, for which the respondents are now
liability for capital gains tax on stocks received by them from Eastern Theatrical, Inc. The liable in taxes on their capital gains.
Rufinos were majority stockholders of Eastern Theatrical Co., Inc (Old ETC) which had a
corporate term of 25 years, which terminated on January 25, 1959, president of which was
ISSUE(s): W/N there was a valid merger and, thus, there was no taxable gain derived therefrom.
Ernesto Rufino. On December 8, 1958, the Eastern Theatrical Co, Inc. (hereinafter New ETC,
with a corporate term of 50 years) was organized, and the Rufinos were also the majority
stockholders of the corporation, with Vicente Rufino as the General-Manager. Both ETCs HELD/RATIO: YES
were engaged in the same business.
• 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.
• Old ETC held a stockholder’s meeting to merge with the New ETC on December 17, 1958 to
In the nature of things, this was not possible. Obviously, it was necessary for the Old
continue its business after the end of Old ETC’s corporate term. The merger was authorized
Corporation to surrender its net assets first to the New Corporation before the latter could
by a board resolution. It was expressly declared that the merger was necessary to continue
issue its own stock to the shareholders of the Old Corporation because the New Corporation
operating the Capitol and Lyric Theaters in Manila even after the expiration of corporate
had to increase its capitalization for this purpose. The Court finds no impediment to the
existence, to preserve both its booking contracts and to uphold its collective bargaining
exchange of property for stock between the two corporations being considered to have been
agreements. Through the two Rufinos (Ernesto and Vicente), a Deed of Assignment was
effected on the date of the merger.
executed, which conveyed and transferred all the business, property, assets and good will of
the Old ETC to the New ETC in exchange for shares of stock of the latter to be issued to the
shareholders at the rate of one stock for each stock held in the Old ETC. The Deed was to
• The criterion of the law is that the purpose of the merger must be for a bona fide business
purpose and not for the purpose of escaping taxes. The case of Helvering v. Gregory stated
that a mere “operation having no business or corporate purpose—a mere devise which put
on the form of a corporate reorganization as a disguise for concealing its real character and
the sole object and accomplishment of which was the consummation of a preconceived plan,
not to reorganize a business but to transfer a parcel of corporate shares.” When the
corporation created is nothing more than a contrivance, there is no legitimate business
purpose. The Court states that there is no such furtive intention in this case. In fact, the New
ETC continues to operate the Capitol and Lyric movie theaters even up to 27 years after the
merger. There is as yet no dissolution, so the Rufinos haven’t gained any benefit yet from
the merger, which makes them no more liable than the time the merger took place.

• The procedure for such merger was prescribed Corporation Code which provided that "a
corporation may, by action taken at any meeting of its board of directors, sell, lease,
exchange, or otherwise dispose of all or substantially all of its property and assets, including
its goodwill, upon such terms and conditions and for such considerations, which may be
money, stocks, bond, or other instruments for the payment of money or other property or
other considerations, as its board of directors deem expedient." The transaction
contemplated in the old law covered the second type of merger defined by Section 35 of the
Tax Code as "the acquisition by one corporation of all or substantially all of the properties of
another corporation solely for stock," which is precisely what happened in the present case.

• In the case of the Old ETC when it was dissolved on December 31, 1958, there has been no
distribution of the assets of the New Corporation since then and up to now. To date, the
private respondents have not derived any benefit from the merger of the Old ETC and the
New ETC almost three decades earlier that will make them subject to the capital gains tax
under Section 35. They are no more liable now than they were when the merger took effect
in 1959, as the merger, being genuine, exempted them under the law from such tax.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed in full, without any
pronouncement as to costs.

OPTIONAL; The Government’s Remedy:

The merger merely deferred the payment for taxes until the future, which the government may
assert later on when gains are realized and benefits are distributed among the stockholders
as a result of the merger. The taxes are not forfeited but merely postponed and may be
imposed at the proper time later on.