Download BIR Rul. 76-89 PDF

TitleBIR Rul. 76-89
TagsDebt Taxes Liquidation Tax Deduction Gift Tax In The United States
File Size104.4 KB
Total Pages4
Document Text Contents
Page 1

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

April 17, 1989


28 000-00 076-89


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

Page 3

Copyright 1994-2006 CD Technologies Asia, Inc. Taxation 2005 3

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

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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