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 Motors
Pilipinas, Inc. (GMPI) is a domestic corporation organized under the laws of the
Philippines; that it is a joint venture corporation owned 60% by General Motors
Overseas Distribution Corporation (GM-US) and 40% by Isuzu Motors Limited of
Japan (ISUZU); that GMPI was engaged in the manufacture of transmissions and
components as well as in the assembly of cars and trucks (largely Isuzu) under the
former PCMP and PTMP programs of government; that in September 1985, due to
economic recession in the Philippines and the depressed automotive market, plus the
non-availability of foreign exchange for the importation of parts for car and truck
assemblies, GMPI ceased its manufacturing and assembly operations; that at the time
operations were terminated, GMPI was insolvent and has since remained insolvent;
that in meetings held in December 1985, the shareholders and the Board of Directors
of GMPI recommended the dissolution of GMPI; that in order to facilitate the
liquidation and dissolution of the company, on September 30, 1986, the stockholders
approved a resolution to shorten GMPI's corporate life to October 15, 1986; that
pursuant to said resolution, GMPI filed with the Securities and Exchange
Commission, an application to amend its Articles of Incorporation to shorten GMPI's
corporate life; that a liquidating trustee was designated to dispose the remaining
assets, satisfy the obligations and wind up the affairs of the company; that based on
the December 31, 1988 unaudited financial statements of GMPI, it has outstanding
liabilities/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

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 Due to Affiliated Companies
Isuzu Motors Limited P113,240
General Motors Corp. (GMC) 19,334 132,574
———— ————
TOTAL P762,281
=======
that the total outstanding liabilities to banks and GMC plus accrued interest amount to
P649,041,000; that the 1987 unaudited financial statements, as submitted with
GMPI's 1987 income tax return, show that as of December 31, 1987 GMPI had a
capital deficiency of P664,522,000; that based on the December 31, 1988 unaudited
financial statements, the capital deficiency is P739,057,000; that pursuant to
liquidation accounting principles, the value of the property, plant and equipment was
adjusted to P20,450,000; that since GM-US, has no further interest to continue its
ownership 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 of
the GMPI shares from GM-US it was agreed that GMPI would "clean-up" the
liabilities shown in the financial statements and that it would have no major current
outstanding liabilities except the liability to Isuzu; that it is proposed that this would
be accomplished when the shares are transferred in three steps, as follows: (1) By
having GMPI's creditor banks waive accrued interest totalling P102,615,000 on the
non-trade and trade related debt; (2) By having these banks assign to GM-US, its
GMPI non-trade related receivables totalling P280,150,000. At that time GM-US will
condone the total GMPI indebtedness due to it amounting to P299,484,000 including
the aforementioned non-trade debt as well as other non-trade liabilities due GMC
totalling P19,334,999; (3) By having the banks grant a participation to GM-US in
GMPI trade related receivables totalling P246,942,000 GM-US would then assign
these receivables to Isuzu. As approved by the Central Bank of the Philippines and
the SEC, Isuzu would accept pesos from GMPI in repayment of the trade debt and
simultaneously reinvest the pesos in GMPI as paid-in surplus; that subsequent to the
three-step transaction outlined above, and after GM-US assignment of GMPI shares
to Isuzu, the latter as the new 100% parent company may consider infusing additional
capital to restore the business into a viable operation and eliminate the capital
deficiency; that inasmuch as the business operations of the company will be revived
in the future by Isuzu, the company will resume its "going concern" status following
the transfer of share by GM-US; and that as a going concern, its assets previously
adjusted to liquidation values shall be restored to its valuation prior to liquidation of
P19,579,000 including depreciation and amortization up to December 31, 1988.

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

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effect that the bank's waiver of accrued interest on the non-trade and trade related
indebtedness of GMPI and GM-US condonation or forgiveness of GMPI's non-trade
related 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 hereby
confirmed. Cancellation and forgiveness of indebtedness may amount to a payment of
income, to a gift, or to a capital transaction, dependent upon the circumstances. If for
example, an individual performs services for a creditor who, in consideration thereof
cancels the debt, income to that amount is realized by the debtor as compensation for
his services. If, however, a creditor merely desires to benefit a debtor and without any
consideration therefor cancels the debt, the amount of the debt is a gift from the
creditor to the debtor and need not be included in the latter's gross income. If a
corporation to which a stockholder is indebted forgives the debt, the transaction has
the effect of the payment of a dividend. (Sec. 50 Revenue Regulations No. 2) The
waiver of interest by the banks on non-trade and trade related indebtedness of GMPI
is not subject to income tax considering that the deduction of said interest as expense
in prior years did not offset nor reduce the taxable income of GMPI since it was in a
financial loss position even without the deduction. (See Barnhart-Marrow
Consolidated v. Commissioner of Internal Revenue, 47 BTA 590) Moreover, when a
creditor cancels a debt as part of a business transaction, the debtor is enriched or its
net assets has been increased and, therefore, he realized taxable income (Philippine
Fiber Processing Co. v. CIR, CTA Case No. 1407 Dec. 29, 1966). However, a
transaction whereby nothing of exchangeable value comes to or is received by a
taxpayer does not give rise to or create taxable income. (See Dallas Transfer and
Terminal 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 is
not subject to income tax since before and after the condonation GMPI remains
insolvent, i.e., in a capital deficiency position. The condonation is likewise not subject
to gift tax since there is no donative interest on the part of GM-US but solely for
business consideration since Isuzu will only acquire the GMPI shares from GM-US if
GMPI has a "clean" balance sheet with no outstanding liabilities except those to
Isuzu.

Moreover, a return to solvency due to a possible future additional capital

infusion by Isuzu and/or subsequent profitability in a different taxable year will not
affect the non-taxability of the condonation. cdta

Very truly yours,

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 (SGD.) JOSE U. ONG
Commissioner

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