BIR Ruling No. 079-10

September 23, 2010 BIR RULING NO. 079-10 Land Bank of the Philippines Employees Association 21st Floor, Landbank Plaza 1598 M.H. Del Pilar, Malate, Manila Attention: Loreto P. Chua President Gentlemen : This pertains to your letter dated April 12, 2010 addressed to then Secretary Margarito B. Teves, Department of Finance, which was endorsed to our Office on April 23, 2010. In your letter, it was requested that the definition of fair market value provided in Sec. 7 of Revenue Regulations No. 6-2008 be reviewed. Moreover, it was also requested that the Certificate Authorizing Registration pertaining to your sale of shares of stock to Land Bank of the Philippines Provident Fund (LBPPF) be issued. The facts, as you represent, are as follows: On April 17, 2009, the Land Bank of the Philippines Employees Association (LBPEA) sold its shares of stock not traded in the stock exchange. The corresponding Capital Gains Tax and Documentary Stamp Tax were paid on May 6, 2009 based on the computation of a BIR personnel in Revenue District Office No. 33, Region No. 6. Despite having paid the initial assessment, you were required to pay donor's tax and penalties because the selling price was less than the fair market value as defined under Revenue Regulations (RR) No. 6-2008. It is your argument that the definition of 'fair market value' under the regulations does not conform to the acceptable meaning in actual business transactions. In reply, please be informed that the imposition of donor's tax on the transaction is based on Section 100 of the Tax Code, which reads: "SEC. 100. Transfer for Less Than Adequate and Full Consideration. Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year." (Emphasis supplied) For purposes of transfers of shares of stock not listed in the stock exchange, the 'fair market value' is determined under paragraph (c.2.2) of RR No. 6-2008 which states: (c.2) Definition of "fair market value" of the Shares of Stock. For purposes of this Section, "fair market value" of the shares of stock sold shall be: (c.2.1) . . . (c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the book value of the shares of stock as shown in the financial statements duly certified by an independent certified public accountant nearest to the date of sale shall be the fair market value. TaCDAH While we agree that the general definition of 'fair market value' is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, it is difficult to determine the fair market value of shares of stocks which are not listed in the stock exchange. The government cannot presume that the amount indicated in the deed of sale is the fair market value. This is because transactions involving shares of stocks not listed in the stock exchange are usually not considered as arms-length transactions because the parties are closely related and may have shared interests. For this reason, RR No. 6-2008 pegged the fair market value to the book value of the shares of stock. This is a reasonable rule as the book value approximates the fair market value of the shares of stock. In view of the foregoing, your requests that the definition of fair market value provided in Revenue Regulations No. 6-2008 be reviewed and that the Certificate Authorizing Registration pertaining to your sale of shares of stock to Land Bank of the Philippines Provident Fund (LBPPF) be issued are hereby denied. EDATSC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue