Tax on the Remaining Cost and Excess of the Appraised Value of Compañia Maritima's Vessels

January 22, 1958 BIR RULING NO. 057-58 Messrs. Rufino Melo & Co. Room 211 Maritima Building Manila Gentlemen : Reference is made to your letter dated September 17, 1957, stating the following: "On behalf of our client, the Compaia Maritima, we have the honor to request opinion as to whether our client's proposal to record the surplus arising from the appraisal of their vessels will be subject to income taxes: cdt The appraisal was brought by the change of the Company from "Sociedad Anonima" to a corporation. To illustrate our plan, we are setting forth hereunder a typical case: Original Cost of Vessel P100,000.00 Accumulated Depreciation, Dec. 31, 1956 80,000.00 ____________ Net Book Value, Dec. 31, 1956 P20,000.00 Appraised Value at December 31, 1956 70,000.00 ____________ Excess of Appraised Value Over Book Value P50,000.00 =========== Estimated useful economic life from January 1, 1957 10 years =========== To record the above appraisal, three (3) alternative entries are proposed, to wit: 1) Vessels Account P50,000.00 Appraisal Surplus P50,000.00 2) Reserve for Depreciation 50,000.00 Appraisal Surplus 50,000.00 3) Reserve for Depreciation 80,000.00 Vessels Account 30,000.00 Appraisal Surplus 50,000.00 The proposed entry to record the annual depreciation charges under any of the above alternatives will be based on the appraised value of P70,000.00 as follows: Provision for Depreciation (2/7) of P7,000.00) P2,000.00 Appraisal Surplus (5/7) of P7,000.00 5,000.00 Reserve for Depreciation P7,000.00 Please not that under any alternative, the depreciation chargeable against income will not in any way exceed the original cost; neither will any part of the appraisal surplus find its way into the income accounts. cdtech "The underlying reason of the management of the Compaia Maritima in proposing to appraise their vessels is to give due recognition to the fact that replacement costs of vessels are very much higher than original costs in view of constantly rising construction costs." You now request opinion of this Office as to whether your client may be allowed to spread ratably over a period of ten (10) years the remaining cost of the abovementioned vessel and whether the excess of the appraised value of the same over its net book value is subject to income tax. In reply thereto, I have the honor to inform you that, if it develops that the useful life of the property will be longer or shorter than the useful life as originally estimated under all the then know facts, the portion of the cost or other basis of the property not already provided for through depreciation allowances should be spread over the remaining useful life of the property as reestimated in the light of the subsequent facts, and depreciation deductions taken accordingly. (Sec. 109, Revenue Regulations No. 2) Accordingly, the cost of the abovementioned vessel in the amount of P20,000 which has not yet been recovered through depreciation may be spread over its estimated remaining useful life of ten (10) years. As regards the amount of P50,000.00 representing the excess of the appraised value of the abovementioned vessel over its net book value, please be informed that the aforesaid amount is not subject to income tax as no income is realized on account of the appraisal of the said property. cdta Very truly yours, (SGD.) JOSE ARAAS Commissioner of Internal Revenue