Messrs. Luis T. Fernandez

November 20, 2008 BIR RULING [DA-(I-037) 452-08] 40 (B) (2); RR 10-2008; #221-86 Messrs. Luis T. Fernandez Vicente T. Fernandez Ramon L. Fernandez Jose Carlos Fernandez Ms. Ma. Lourdes Fernandez c/o Nestor B. Quesada 3rd Floor, Maritima Building 117 Dasmarias St., Manila Sir/Madam : This refers to your letter dated October 20, 2008 requesting for confirmation of your opinion that the determination of the deductible cost of inherited shares of stocks and the determination of gain or loss shall be based on the fair market value of such shares as of the date it was acquired through inheritance. It is represented that the heirs of the late Carlos P. Fernandez, namely, Luis T. Fernandez, Ma. Lourdes Fernandez, Vicente T. Fernandez, Ramon L. Fernandez and Jose Carlos Fernandez used the current value as required under Revenue Regulations No. 2-82, for purposes of fixing the current selling price based on the current financial statement of the corporation covering the shares sold; and that however, in the determination of the cost of the said shares, the book value of the inherited shares as of the date of its acquisition by inheritance was used for the purpose of computing the gain or loss. In reply, please be informed that Section 40 (B) (2) of the Tax Code of 1997, as amended, provides to wit: "SEC. 40. Determination of Amount and Recognition of Gain or Loss. (A) . . . (B) Basis for Determining Gain or Loss from Sale or Disposition of Property. The basis of property shall be (1) . . . (2) The fair market price or value as of the date of acquisition, if the same was acquired by inheritance;" (Underscoring Supplied) cSEaDA In relation thereto, Revenue Regulations (RR) No. 6-2008 dated April 22, 2008, prescribing the rules on the taxation of sale, barter, exchange or other disposition of shares of stock held as capital assets, particularly Section 7 thereof, provides, viz.: "SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A LOCAL STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7)(c), 28(B)(5)(c) OF THE TAX CODE, AS AMENDED. xxx xxx xxx (c) Determination of Amount and Recognition of Gain or Loss. xxx xxx xxx (c.3) Determination of Gain or Loss from Sale or Disposition of Shares of Stock. The gain from the sale or other disposition of shares of stock shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received, if any. (c.3.1) Basis for Determining Gain or Loss from Sale or Disposition of Shares of Stock. Gain or loss from the sale, barter or exchange of property, for a valuable consideration, shall be determined by deducting from the amount of consideration contracted to be paid, the vendor/transferor's basis for the property sold or disposed plus expenses of sale/disposition, if any. xxx xxx xxx (c.3.1.2) Acquired by Devise, Bequest or Inheritance. If the property was acquired by devise, bequest or inheritance, the basis shall be the fair market value of such property at the time of death of the decedent." (Underscoring ours) In applying the afore-quoted provisions of Section 40 (B) (2) of the Tax Code of 1997, as amended, and the implementing rules prescribed in RR No. 6-2008, it is clear that for purposes of determining the amount and recognition of gain or loss and determination of the basis of the property from sale or disposition thereof, such as shares of stocks acquired by inheritance, the fair market price or value of the shares of stocks at the time of death of the decedent or fair market price or value as of the date of acquisition, shall be used. (BIR Ruling No. 221-86 dated October 17, 1986) Furthermore, the gain or loss from the sale of shares of stocks shall be determined by deducting from the amount of consideration contracted to be paid, the vendor/transferor's basis for the property sold or disposed plus expenses of sale/disposition, if any. In view thereof, this Office hereby confirms your opinion that the determination of the deductible cost of inherited shares of stocks and the determination of gain or loss shall be based on the fair market value of such shares as of the date it was acquired through inheritance. IcADSE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service