BIR Ruling No. 019-80

October 6, 1980 BIR RULING NO. 019-80 083-00 000-00 19-80 Padilla Law Office 7th Floor, Padilla-de los Reyes Bldg. 232 Juan Luna, Manila Attention : Atty . Teodoro Padilla Gentlemen : This refers to your letter dated September 18, 1980 requesting a ruling on the tax consequence of the following proposed transaction involving the Bank of the Philippine Islands (BPI) and the Commercial Bank and Trust Corp. (CBTC), both commercial banks and trust corporations organized and existing under the laws of the Philippines and duly licensed as such by the Central Bank of the Philippines. cdt You have represented that BPI has acquired a controlling interest in CBTC, by purchasing at P275.00 per share, enough common shares of CBTC to carry out merger of CBTC with and into BPI; that CBTC shall cease to exist while BPI shall continue to exist; that CBTC shall declare and pay a liquidating dividend to its common stockholders which shall consist of CBTC distributing all of its property or assets in complete liquidation and dissolution, thus making CBTC stockholders the owners pro-indiviso of all of CBTC assets, subject to CBTC existing debts, obligations and liabilities and the preferential rights of CBTC's preferred stockholders. You also represented that BPI being the predominant pro-indiviso co-owner of CBTC assets, also intends and agrees to purchase the pro-indiviso shares of other CBTC common stockholders at the rate of P275.00 for every common share held prior to the liquidating dividends; that BPI will also issue 485,000 preferred shares in the amount of P48.5 million with the same rights, terms and conditions as the existing preferred shares of CBTC, in payment of CBTC preferred share at the rate of one for one. Upon accomplishment of the foregoing transactions, BPI will become the owner of all the assets of CBTC and will assume all the liabilities of CBTC, after which CBTC shall cease to exist. In reply, I have the honor to inform you as follows: 1. The following stock transactions shall be subject to the of 1% stock transaction tax imposed by Section 210(a) of the Tax Code if the stocks disposed of were acquired by the seller or transferor on or after November 5, 1970; a. Sale to BPI of enough CBTC common shares, thereby resulting in BPI's acquisition of controlling interest in CBTC; b. Sale to BPI of the remaining common shares held by other CBTC stockholders, as a consequence of which CBTC will be 100% owned by BPI; c. Exchange of 485,000 CBTC preferred shares by CBTC stockholders with BPI preferred shares, on a one to one basis; However, if the stocks were acquired prior to November 5, 1970 the seller or transferor of the same shall be subject to the capital gains tax as provided for under Section 34 of the Tax Code. 2. No gain or loss will result to CBTC upon the complete liquidation and dissolution of CBTC under which CBTC will only distribute all of its property or assets to its common stockholders which is subject to its existing liabilities and the preferential rights of the preferred stockholders. 3. The distribution by CBTC of all its assets and property to its stockholders results in the acquisition by the latter of liquidating dividends wherein said stockholders shall realize capital gain or loss consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shares. (Sec. 83 and Sec. 34; Tax Code, Sec. 255 and 256, Revenue Regulations No. 2). In the case of BPI, however, considering that it acquired the CBTC shares at P275.00 a share in an arm's length transaction, it is understood that the fair market value of the liquidating dividend will not be less than P275.00 a share and therefore BPI will not reflect any loss upon receipt of the liquidating dividend. 4. The fair market value of the liquidating dividend shall consist of the difference between the fair market value of CBTC assets after deducting CBTC liabilities and P48.5 million worth of CBTC preferred shares exchanged with BPI preferred shares; 5. BPI should take up in its books all of the CBTC assets at their fair market value as of the date of payment of the liquidating dividend. cdta Very truly yours, ROMULO M. VILLA Acting Commissioner