Refund claim by an absorbed corporation in a merger

Atty. Ayesha Hania B. MatanogTHERE are various reasons corporations would enter into a merger. The usual reason is that the integration of the operations of the constituent corporations will result in economies of scale and efficiency in management. But whatever is the reason, only one corporation will survive and all the other corporations will effectively be dissolved. The separate existence of the constituent corporations will cease, except that of the surviving corporation.

How will the cessation of the legal personality of an absorbed corporation affect its claim for refund of unutilized taxes, such as excess creditable withholding taxes? A recent decision of the tax court in Court of  Tax Appeals (CTA) EB 1203, December 02, 2015, provides an insight on the effect of the approval of merger by the Securities and Exchange Commission (SEC) on the refund claim of an absorbed corporation.

In this case, the merger of the constituent corporations was approved by the SEC on March 29, 2010. On April 15, 2010, one of the absorbed corporations filed with the Commissioner of Internal Revenue a written claim for refund or issuance of tax credit certificate of its unutilized creditable withholding taxes. On the same day, it filed its judicial claim for refund with the CTA via a petition for review. An amended petition was subsequently filed to properly designate the surviving corporation as the correct petitioner.

The court ruled to dismiss the case for lack of jurisdiction over the subject matter due to the taxpayer’s (surviving corporation’s) failure to exhaust administrative remedies. The court noted that the plan of merger was approved by the SEC on March 29, 2010. Thus, the absorbed corporation ceased to exist when the merger was approved by the SEC. Nevertheless, it was the absorbed corporation who filed the administrative claim, not the surviving corporation. The court considered such to be fatal to the taxpayer’s claim, considering that the absorbed corporation no longer had any legal personality at the time the administrative claim was filed, and no administrative claim was filed by the surviving corporation itself, despite the plan of merger having been approved by the SEC. In other words, no administrative claim can be considered filed, thus, no proceeding can be maintained in any court for the recovery of the alleged
unutilized taxes.

The court stressed that one of the requirements to be entitled to a refund or issuance of tax credit certificate is that the claim must be filed within the two-year reglementary period. In this case, no such claim was filed by an entity with legal personality, hence, there is no decision or even inaction of the commissioner to appeal from since none was necessitated by a valid administrative claim. The court did not fail to recognize that the surviving corporation possesses all the rights and privileges that the absorbed corporation had. However, it stressed that the surviving corporation can only acquire or benefit what the dissolved corporation had during its lifetime. The court went on to say that the fact is that absorbed corporation no longer existed when the only administrative claim was filed. The surviving corporation cannot benefit from a claim of nonentity.

While the legal battle in the case is not yet final, which may or may not change, it is significant for taxpayers to be aware of its implications. There is no doubt a surviving corporation in a merger absorbs all the assets and assumes all the liabilities of the absorbed corporations. But it can do so only with respect to transactions entered into by the absorbed corporation prior to the effectivity of the merger as approved by the SEC. An absorbed corporation may no longer legally act after the effectivity of the merger. With respect to refund of taxes, the case teaches us that an administrative claim filed by the absorbed corporation with the Bureau of Internal Revenue prior to the effectivity of the merger inures to the surviving corporation. Upon the effectivity of the merger, the absorbed corporation is divested of its legal personality. Hence, it does not have any personality to file a claim. Should there be taxes that are rightfully the subject of a refund, the same should be pursued in the name of the surviving corporation.

The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of World Tax Services (WTS) Alliance.

The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice.  If you have any comments or questions concerning the article, you may e-mail the author at or call 403-2001 local 170.


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