bir rul. 76-89

Copyright 1994-2006 CD Technologies Asia, Inc. Taxation 2005 1

April 17, 1989

BIR RULING NO. 076-89

28 000-00 076-89

Gentlemen:

This refers to your letter dated February 24, 1989 stating that General MotorsPilipinas, Inc. (GMPI) is a domestic corporation organized under the laws of thePhilippines; that it is a joint venture corporation owned 60% by General MotorsOverseas Distribution Corporation (GM-US) and 40% by Isuzu Motors Limited ofJapan (ISUZU); that GMPI was engaged in the manufacture of transmissions andcomponents as well as in the assembly of cars and trucks (largely Isuzu) under theformer PCMP and PTMP programs of government; that in September 1985, due toeconomic recession in the Philippines and the depressed automotive market, plus thenon-availability of foreign exchange for the importation of parts for car and truckassemblies, GMPI ceased its manufacturing and assembly operations; that at the timeoperations were terminated, GMPI was insolvent and has since remained insolvent;that in meetings held in December 1985, the shareholders and the Board of Directorsof GMPI recommended the dissolution of GMPI; that in order to facilitate theliquidation and dissolution of the company, on September 30, 1986, the stockholdersapproved a resolution to shorten GMPI's corporate life to October 15, 1986; thatpursuant to said resolution, GMPI filed with the Securities and ExchangeCommission, an application to amend its Articles of Incorporation to shorten GMPI'scorporate life; that a liquidating trustee was designated to dispose the remainingassets, satisfy the obligations and wind up the affairs of the company; that based onthe December 31, 1988 unaudited financial statements of GMPI, it has outstandingliabilities/indebtedness to banks and affiliates in the following amounts: cdasia

Bank Debt

Non-Trade Related Principal P280,150 Interest 54,522 Trade Related Principal 246,942 Interest 48,093


Due to Affiliated Companies

Isuzu Motors Limited P113,240General Motors Corp. (GMC) 19,334 132,574 ———— ————TOTAL P762,281 =======

that the total outstanding liabilities to banks and GMC plus accrued interest amount toP649,041,000; that the 1987 unaudited financial statements, as submitted withGMPI's 1987 income tax return, show that as of December 31, 1987 GMPI had acapital deficiency of P664,522,000; that based on the December 31, 1988 unauditedfinancial statements, the capital deficiency is P739,057,000; that pursuant toliquidation accounting principles, the value of the property, plant and equipment wasadjusted to P20,450,000; that since GM-US, has no further interest to continue itsownership in the inactive corporate shell of GMPI, GM-US, will assign its 60%shareholdings in GMPI to Isuzu; that in connection with the proposed acquisition ofthe GMPI shares from GM-US it was agreed that GMPI would "clean-up" theliabilities shown in the financial statements and that it would have no major currentoutstanding liabilities except the liability to Isuzu; that it is proposed that this wouldbe accomplished when the shares are transferred in three steps, as follows: (1) Byhaving GMPI's creditor banks waive accrued interest totalling P102,615,000 on thenon-trade and trade related debt; (2) By having these banks assign to GM-US, itsGMPI non-trade related receivables totalling P280,150,000. At that time GM-US willcondone the total GMPI indebtedness due to it amounting to P299,484,000 includingthe aforementioned non-trade debt as well as other non-trade liabilities due GMCtotalling P19,334,999; (3) By having the banks grant a participation to GM-US inGMPI trade related receivables totalling P246,942,000 GM-US would then assignthese receivables to Isuzu. As approved by the Central Bank of the Philippines andthe SEC, Isuzu would accept pesos from GMPI in repayment of the trade debt andsimultaneously reinvest the pesos in GMPI as paid-in surplus; that subsequent to thethree-step transaction outlined above, and after GM-US assignment of GMPI sharesto Isuzu, the latter as the new 100% parent company may consider infusing additionalcapital to restore the business into a viable operation and eliminate the capitaldeficiency; that inasmuch as the business operations of the company will be revivedin the future by Isuzu, the company will resume its "going concern" status followingthe transfer of share by GM-US; and that as a going concern, its assets previouslyadjusted to liquidation values shall be restored to its valuation prior to liquidation ofP19,579,000 including depreciation and amortization up to December 31, 1988.

In connection therewith, you now request confirmation of your opinion to the


effect that the bank's waiver of accrued interest on the non-trade and trade relatedindebtedness of GMPI and GM-US condonation or forgiveness of GMPI's non-traderelated indebtedness are not subject to income tax nor to gift tax.

In reply, thereto, I have the honor to inform you that your opinion is herebyconfirmed. Cancellation and forgiveness of indebtedness may amount to a payment ofincome, to a gift, or to a capital transaction, dependent upon the circumstances. If forexample, an individual performs services for a creditor who, in consideration thereofcancels the debt, income to that amount is realized by the debtor as compensation forhis services. If, however, a creditor merely desires to benefit a debtor and without anyconsideration therefor cancels the debt, the amount of the debt is a gift from thecreditor to the debtor and need not be included in the latter's gross income. If acorporation to which a stockholder is indebted forgives the debt, the transaction hasthe effect of the payment of a dividend. (Sec. 50 Revenue Regulations No. 2) Thewaiver of interest by the banks on non-trade and trade related indebtedness of GMPIis not subject to income tax considering that the deduction of said interest as expensein prior years did not offset nor reduce the taxable income of GMPI since it was in afinancial loss position even without the deduction. (See Barnhart-MarrowConsolidated v. Commissioner of Internal Revenue, 47 BTA 590) Moreover, when acreditor cancels a debt as part of a business transaction, the debtor is enriched or itsnet assets has been increased and, therefore, he realized taxable income (PhilippineFiber Processing Co. v. CIR, CTA Case No. 1407 Dec. 29, 1966). However, atransaction whereby nothing of exchangeable value comes to or is received by ataxpayer does not give rise to or create taxable income. (See Dallas Transfer andTerminal Warehouse Co. v. Commissioner of Internal Revenue 5 Cir. 70 F 2d 95,13AFTR 930) Accordingly, the condonation of GMPI's indebtedness by GM-US isnot subject to income tax since before and after the condonation GMPI remainsinsolvent, i.e., in a capital deficiency position. The condonation is likewise not subjectto gift tax since there is no donative interest on the part of GM-US but solely forbusiness consideration since Isuzu will only acquire the GMPI shares from GM-US ifGMPI has a "clean" balance sheet with no outstanding liabilities except those toIsuzu.

Moreover, a return to solvency due to a possible future additional capitalinfusion by Isuzu and/or subsequent profitability in a different taxable year will notaffect the non-taxability of the condonation. cdta

Very truly yours,


(SGD.) JOSE U. ONGCommissioner

bir rul. 76-89

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