A.M. Sison, Jr. & Partners

June 3, 2008 BIR RULING [DA-336-08] Secs. 85; 97; BIR Ruling No. 156-98 A.M. Sison, Jr. & Partners Suite 2002-A Security Bank Centre 6776 Ayala Avenue, Makati City Attention: Atty. Antonio L. Cardio Gentlemen : This refers to your letter dated January 29, 2008 requesting in behalf of your clients, Ms. Carla C. Santos and the other heirs of the deceased Horacio A.G. Santos, Jr., confirmation of your opinion that the Corporate Secretary of Empire Insurance Company can transfer to the heirs the 8,020 stock dividends without the necessity of having the Certificate Authorizing Registration (CAR) and the Tax Clearance Certificate (TCL), covering the estate of the deceased amended, on the premise that the 8,020 stock dividends are only the fruits of the 7,855 shares of stock owned by the decedent at the time of his death. As represented, the Bureau of Internal Revenue (BIR) issued Letter of Authority No. LOA-00068825 for the examination of the books of accounts and other accounting records of the Estate of the Late Horacio A.G. Santos, Jr., who died on January 18, 2007, in Bel-Air III Village, Makati City. After the examination conducted and after payment of the estate tax due, the RDO concerned issued on July 24, 2007 the CAR and the TCL for the transfer of the properties included in the inventory of the decedent's gross estate to his heirs, among which are the 7,855 shares of stock in Empire Insurance Company. The book value of these shares is P525.85 per share which was based on the audited financial statements of the company as of December 31, 2006 which was very near the date of death (January 18, 2007) of the decedent. Meanwhile, on July 18, 2007, Empire Insurance Company issued 8,020 shares as stock dividends in the name of Horacio A.G. Santos, Jr. Since these stock dividends were issued after the estate tax return was filed and six (6) months after the death of Horacio A.G. Santos, Jr., they were not included in the CAR and the TCC. The Corporate Secretary of Empire Insurance Company is requiring the heirs to have the CAR and the TCC amended or supplemented to include the stock dividends of 8,020 shares. In reply, please be informed that Section 777 of the Civil Code of the Philippines reads as follows: "Art. 777. The rights to the succession are transmitted from the moment of the death of the decedent." For purposes of determining the estate tax, Section 85 of the Tax Code of 1997, as amended, identifies what constitutes the gross estate of a decedent. It includes the value of all property, real or personal, tangible or intangible, wherever situated owned by the decedent at the time of his death. Pursuant to Section 97 of the Code, the heirs must submit to the Corporate Secretary a certification from the BIR that the estate tax has been paid or that the estate is exempt from payment of the said tax as a condition precedent for the acquisition of ownership over the shares, viz. : "SEC. 97. Payment of Tax Antecedent to the Transfer of Shares; Bonds or Rights . There shall not be transferred to any new owner in the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown. xxx xxx xxx." Thus, upon the death of Horacio A.G. Santos, Jr., his properties including his 7,855 shares in Empire Insurance Company are transmitted through his death to his heirs by virtue of intestate succession, to which the estate tax on the said transmission had been fully paid. From that time on ownership over the said properties were transferred in favor of the heirs. Any gain or benefit realized from the 7,855 shares shall then on be accounted or credited to the heirs as the owners thereof. In other words, the 8,020 shares in Empire Insurance Company issued as stock dividends shall no longer form part of the inventory of assets of the decedent as they already belong to the heirs. (BIR Ruling No. 156-98 dated November 9, 1998) From the foregoing, this Office confirms your opinion that the Corporate Secretary of Empire Insurance Company can transfer to the heirs the 8,020 shares issued as stock dividends without the necessity of having the CAR and TCC amended. Finally, the issuance of the above 8,020 shares as stock dividends in favor of the heirs of Horacio A.G. Santos, Jr., is not subject to income tax, withholding tax nor to the capital gains tax. However, the issuance of the said shares is subject to the documentary stamp tax imposed on original issuance of shares under Section 174 of the Tax Code of 1997, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service