BIR Ruling [DA-177-96]

May 24, 1996 BIR RULING [DA-177-96] Castro Tan & Carag Law Offices Suite 6B, Eisenhower Condominium No. 7 Eisenhower Street, Greenhills 1500 San Juan, Metro Manila Attention: Atty. Othelo C. Carag Gentlemen : This refers to your letter dated April 22, 1996 requesting for a confirmation of your opinion on the formula to be used in computing the book value of the unlisted shares of stock of a corporation for the purpose of determining the capital gains tax due on the sale of said unlisted shares of stock. TIHCcA It is represented that your client, East Asia Power Corporation (EAPC) acquired Five Hundred Thousand (500,000) unlisted shares of stock of Duracom Mobile Corporation (Duracom) from one of the original stockholders of Duracom; that Duracom shares have an aggregate par value of Five Million Pesos (P5,000,000.00) and were acquired by EAPC at a purchase price of Five Million Pesos (P5,000,000.0); that the sale was negotiated in 1995 but was completed and executed only on March 31, 1996; that Duracom was incorporated on October 12, 1993 primarily to build, construct, equip, operate, sell or lease power generation plants, facilities, machineries and equipment; that based on its Balance Sheet as of December 31, 1995, Duracom has total assets of Four Billion One Hundred Eighteen Million Seven Hundred Seventy Six Thousand Four Hundred Seventy One Pesos (P4,118,776,471.00), total liabilities of Three Billion One Hundred Ninety Two Million Seven Hundred Seventy Six Thousand Four Hundred Seventy One Pesos (P3,192,776,471.00), and stockholders equity of Nine Hundred Twenty Six Million Pesos (P926,000,000.00); that as reflected in Duracom's Balance Sheet, the stockholders' equity consists of: Capital Stock P10.00 par value Class A shares Authorized - 3,000,000 shares Subscribed - 750,000 shares P7,500,000.00 Class B shares Authorized - 2,000,000 shares Subscribed - 500,000 shares 5,000,000.00 Deposits on future stock subscriptions 913,500,000.00 P926,000,000.00 ============ and that the deposits on future stock subscriptions in the amount of Nine Hundred Thirteen Million Five Hundred Thousand Pesos (P913,500,000.00) represent the subscriptions of various persons to Ninety One Million Three Hundred Fifty Thousand (91,350,000) shares of stock of Duracom, which subscribed shares cannot be issued until the approval by the Securities and Exchange Commission (SEC) of the application for the increase in the authorized capital stock of Duracom. TAEcCS Based on the foregoing, you now request for a confirmation of your opinion that: "(a) In calculating the book value of the Duracom shares, the Total stockholders' equity is divided by the number of shares of stock outstanding. When shares of stock have been subscribed for but are unissued, the capital stock subscribed should be added to the issued shares to get the shares outstanding. Accordingly, the book value per share of Duracom is Ten Pesos (P10.00) per share computed as follows: Stockholders' Equity No. of shares of stock outstanding P926,000,000.00 = P10.00/share 92,600,000 shares "(b) For purposes of computing the capital gains tax due on the sale of unlisted shares of Duracom, said shares shall be valued at book value nearest the valuation date. Since the Duracom shares were sold at book value of Ten Pesos (P10.00) per share, which book value is equal to the acquisition cost or par value of the Duracom shares of Ten Pesos (P10.00) per share, then there is no gain subject to capital gains tax." In reply thereto, we confirm your opinion that: (1) In determining the book value of the Duracom shares, the total stockholders equity of Duracom is divided by its number of shares of stock outstanding. When shares of stock have been subscribed for but are unissued, the subscribed but unissued shares should be added to the issued shares to get the shares outstanding (J. Smith, Jr., K. Skousen, M. Kimwell, Intermediate Accounting, 1991, Part II, p. 868). Accordingly, the subscribed shares totalling Ninety One Million Three Hundred Fifty Thousand (91,350,000) shares corresponding to the Deposits for Future Stock Subscriptions in the amount of Nine Hundred Thirteen Million Five Hundred Thousand Pesos (P913,500,000.00) shall be added to the One Million Two Hundred Fifty Thousand (1,250,000) issued shares of Duracom to get the number of shares outstanding which shall be applied as divisor on the stockholders equity in computing the book value per share (BIR Ruling No. 203-89 dated September 21, 1989). Thus, the book value per share of Duracom is Ten Pesos (P10.00) computed as follows: CTSDAI Stockholders' Equity P926,000,000.00 = = P10.00/share No. of shares of 92,600,000 shares stock outstanding (2) For purposes of computing the capital gains tax due on the sale of unlisted shares of Duracom, said shares shall be valued at book value nearest the valuation date (Section 6 (a) (3) (i), Revenue Regulations No. 2-82). Since the Duracom share were sold at book value of Ten Pesos (P10.00) per share which is equal to the acquisition cost or par value of the Duracom shares of Ten Pesos (P10.00) per share, then there is no gain subject to capital gains tax under Section 21 (d) or Section 24 (e) (2) of the Tax Code, as amended. Very truly yours, (SGD.) ALICIA P. CLEMENO Assistant Commissioner (Legal Service)