Valuation of Book Value of Shares of Stock Owned by A Close Corporation

November 11, 1970 BIR RULING NO. 047-70 Book value of shares of stock owned by a close corporation, valuation of . This refers to your letter dated August 10, 1970 requesting a ruling that, under the facts therein stated, which we quote hereunder, the value of the shares of stock of a close corporation distributed as property dividend is the measure of the taxable income to the recipient. "X Co. is a resident foreign corporation. It owns 36,576 shares of stock or 99.94% of the issued and outstanding capital stock of a domestic corporation (Y Co.). X Co. also owns 47.06% of the issued and outstanding capital stock of another domestic corporation (Z Co.), while Y Co. owns the remaining 32.94%. The shares of stock of Z Co. have no par value. Z Co. is a close corporation and its shares of stock are not traded in the stock market. Y Co. plans to distribute all the shares of stock of Z Co. held by it as property dividend to X Co." aisa dc In reply, I have the honor to inform you that book values are often arbitrary, and bear but slight relations to actuality. They are not conclusive, and in some cases, are even misleading. It is for this reason that in determining the fair market value of shares of stock, the book value thereof is only one of the factors to be considered. It is represented that the shares of stock in question are not traded in the stock market. We presume by such presentation that the said shares of stock are not even listed in any stock exchange, considering that they were issued by a close corporation. If such be the case, then the fair market value of the above mentioned shares of stock shall be determined by considering the nature and history of the business, book value of the stock, earning and dividend paying capacity of the Company, goodwill, and sales of both the stocks to be valued and those of companies similarly situated. However, in the absence of said factors by which to determine the market value, the book value of such shares of stock may serve as basis in determining the fair market value thereof.