Tax Consequence of Sale by Baliuag Electric Light and Power Co., Inc. to Meralco of Its Electric System

December 1, 1987 BIR RULING NO. 388-87 227 192-82 388-87 Gentlemen : This refers to your letter dated April 9, 1987 requesting a ruling on the tax consequence of the sale by your client, Baliuag Electric Light and Power Company, Inc. to Meralco of its electric system including its electric and non-electric assets which are necessary in the operation of its electric service consisting of transformers and accessories, poles and hardwares, wires and cables, substation facilities, customer's meters, office equipment, furniture and fixtures, real properties and improvements thereon, rolling equipment, accounts receivables, together with all the rights and privileges necessary for the operation of the electric service in the areas being served by your client under its franchise. It is represented that your client is a grantee of a legislative franchise to generate, distribute and sell electric current for light, heat and power; that pursuant to the franchise rationalization program of the National Government and through a cabinet recommendation approved by the President of the Philippines on November 8, 1982 which enjoins Meralco to extend its electric services to areas within a 60 kilometer radius from Metro Manila, the whole franchised area of your client has been affected; that the electric operations of said areas by virtue of said program will be taken over by Meralco; that as a consequence thereof, your client was forced to sell its entire electric system; that the stockholders of your client will not dissolve the corporation but will engage in other lines of business covered by the secondary purposes of its articles of incorporation; and that the aforesaid sale took place before the effectivity of Executive Order No. 72 on February 10, 1987. In reply thereto, I have the honor to inform you that the income derived by your client from the aforementioned sale are earnings incidental and necessarily connected with the operation of its franchise. (Phil. Power Development Co. vs. Commissioner, CTA Case No. 1152, Oct. 13, 1965); hence, your client is subject only to the 2% franchise tax which is in lieu of all taxes. (Sec. 267(b), Tax Code prior to its amendment by Executive Order No. 72) Consequently, the net income that your client derived from said sale is exempt from corporate income tax. Moreover, in case your client sustained a loss from the aforesaid sale, said loss is not deductible for income tax purposes since your client is subject only to a 2% franchise tax in lieu of all taxes. cdta Very truly yours, (SGD.) EUFRACIO D. SANTOS Officer-in-Charge