Tax Consequence of the Proposed Transaction Involving BPI and Family Bank and Trust Co.

February 7, 1985 BIR RULING NO. 014-85 83 19-80 014-85 Gentlemen : This refers to your letter dated November 26, 1984 requesting a ruling on the tax consequence of the following proposed transaction involving the Bank of the Philippine Islands (BPI) and the Family Bank and Trust Co. (FBTC) both commercial banks and trust corporations, duly licensed by the Central Bank of the Philippines as "universal banks." It is represented that in line with the policy of the Government to strengthen the banking system and to encourage the merger or consolidation of banks, and Monetary Board in Resolution No. 110, dated August 31, 1984, approved the acquisition by BPI of a controlling interest in FBTC with a view to merging FBTC into the BPI universal banking group under certain terms and conditions; that having acquired a controlling interest in FBTC, BPI now intends to take the following steps to accomplish the merger; (a) that FBTC will organize a wholly owned savings bank subsidiary, to be called BPI-Family Bank, to which FBTC will transfer certain FBTC branches that may not be integrated into the BPI commercial banking branch network, such as when the FBTC branch happens to be located very close to an existing BPI branch that this savings bank subsidiary will be capitalized entirely with FBTC assets, in other words, FBTC will transfer to it the assets and liabilities of certain branches at book value and receive in exchange shares of stock in BPI-Family Bank equivalent to the book value of these assets minus liabilities; (b) that FBTC prior to its liquidation will redeem all of the outstanding preferred shares; (c) that upon redemption of all its preferred shares, FBTC will declare a liquidating dividend consisting of all its assets, subject to all its existing liabilities, in exchange for all its common stock. It is expected that BPI at that point in time will be the only holder of FBTC common stock, and therefore, it will receive all the assets and assume all the liabilities of FBTC. Among such assets will be the shares of stock of FBTC in its wholly owned subsidiary. BPI-Family Bank as well as in other subsidiaries of FBTC; and (d) that upon the distribution of all its assets and assumption of all its liabilities, in exchange for all its common stock, FBTC will dissolve and cease to exist. cdt In reply, I have the honor to inform you as follows: 1. The sale of FBTC common shares to BPI resulting in BPI's acquiring a controlling interest in FBTC is subject to the stock transaction tax of 1/4 of 1% on the gross selling price of the shares of stock sold, if such shares are listed and traded through a local stock exchange; otherwise, to the capital gains tax at the rates prescribed by Section 34(g) of the Tax Code as amended by Batas Pambansa Blg. 221 as implemented by Revenue Regulations No. 2-82; 2. FBTC will not realize any gain or loss in forming a wholly owned savings bank subsidiary, to be called BPI-Family Bank, and transferring thereto certain FBTC branch assets and liabilities as capital and receiving in exchange shares of stock in BPI-Family Bank equivalent to the book value of those assets minus liabilities. (Sec. 35(c)(2)(c). Tax Code as amended) 3. Upon the redemption of their preferred shares, the preferred shareholders of FBTC will realize capital gain or loss consisting of the difference between the adjusted basis of the shares and the redemption price of such shares; 4. Upon complete liquidation of FBTC, BPI will realize gain or loss consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost of BPI of its FBTC common shares; 5. The fair market value of the liquidating dividend will be the fair market value of the FBTC assets received minus the liabilities assumed; 6. BPI should take up in its books all of the FBTC assets at their fair market value as of the date of payment of the liquidating dividend. cd Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner