Exemption on the Quitclaim Made by MCCII and the Group of Prospective Stockholders

December 19, 1988 BIR RULING NO. 586-88 27 270-87 586-88 Gentlemen : This refers to your letter dated November 24, 1988 stating that your client, Mabuhay Vinyl Corporation (MVC) is indebted to the Development Bank of the Philippines/Asset Privatization Trust (DBP/APT) in the approximate amount of P1.2 billion inclusive of accrued interest and penalties which it intends to liquidate in the following manner: "1. Maria Cristina Chemical Industries, Inc. (MCCII) a substantial stockholder of MVC and a group of prospective investors, have offered to retrieve the account from DBP/APT on a direct Debt Buy Out Scheme based on the average of two (2) appraisals plus 10% thereof; "2. Based on the average of two (2) appraisals plus 10% thereof, the direct debt buy out from DBP/APT of the indebtedness P1.2 billion will involve the payment by MCCII and the group of prospective investors to DBP/APT of the amount of P400 million. Upon payment of the P400 million, DBP/APT will deliver the debt instruments for the P1.2 billion debt of MVC to MCCII and the group of prospective investors and consider the indebtedness fully paid and discharged; "3. MCCII and the group of prospective investors in turn will surrender the debt instruments worth P1.2 billion to MVC in exchange for new shares of the latter worth P400 million and a quitclaim for the balance of P800 million in favor of MVC." that you are of the opinion that the balance of P800 million covered by the quitclaim of MCCII and the group of prospective investors represents additional contribution in the form of donated surplus without the necessity of MVC issuing additional shares of stocks. In reply thereto, please be informed that since the amount of P800 million covered by the quitclaim represents additional contribution in the form of donated surplus without the necessity of MVC issuing additional shares of stock, it is a capital investment which is not included within the purview of the term "taxable income" as defined in Section 27 in relation to Section 28 of the Tax Code, as amended. Accordingly, the amount of P800 million covered by the quitclaim made by MCCII and the group of prospective stockholders is not subject to income tax. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner